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Second thoughts

This week I would like to explore three ideas on the state second pension, targeting protected rights funds and protection benefits on pension plans. At first glance, these ideas may not appear to be massive opportunities but, if managed as a concerted campaign, they can really give your business a boost.

State second pension

For Scottish football fans, 1978 was a year of great hope in the World Cup in Argentina but it came to a sticky end one hot night against Peru.

The State Earnings Related Pension Scheme, another feature of 1978 and also the subject of high hopes, has taken longer to come to an end. Launched by Labour to provide an earnings-related top-up to the basic state pension, it perished on April 5, 2002.

It was replaced by the state second pension. Any benefit built up under Serps will remain, but from April 6, 2002 all new benefits will be built up under the S2P scheme.

This additional pension is now available for the first time for certain carers and disabled people as well as the employed.

As 60 per cent of carers are women, the change is particularly good news for them. In fact, women stand to benefit the most from the S2P on the whole as they traditionally represent a large proportion of low earners.

An important aspect of the new system will be a so called “notional income level”. Initially set at £10,800, incomes of less than this but more than £3,900 will be treated as £10,800 for the purposes of S2P. They will also attract double the benefit percentage that they would have been entitled to under Serps.

On a salary of £6,000, this is forecast to represent an extra £45 a week, taking the benefit from £12 to £57.

Remember, the benefit on a £10,800 salary should more than double, going from £28 to £57.

To ease the considerable burden of providing this additional pension, the Govern-ment encourages employees to opt out of the S2P.

What does all this mean for your clients?

The number of people who are aware of the change from Serps to S2P is likely to be very small. This presents you with the opportunity to contact your clients to advise them of the changes and to review their contracting out status which may not be suitable for everyone. The pension that becomes payable under the private pension plan may be more or less than the S2P pension that has been given up.

At Scottish Life, we have calculated ages at which we suggest that contracting out is unlikely to benefit your clients. These are 58 and over if you are male and 52 and over if you are female. This requires careful advice and, while doing so, you may want to review your clients&#39 pension payment levels and current financial needs.

It can also be an opportunity to generate new clients or to start developing a client base for the future. Potential clients could be graduates in their first job, a couple starting a family or a person setting up their own company.

These are all groups of people who may not have a lot of disposable income now but who are likely to have a significant increase in earnings in the future. They still need to make the most of their pension arrangements and contracting out could be the perfect way to start a long and fruitful customer relationship.

Targeting protected rights funds

Contracting out of Serps has been available since 1978 and, while the average size of funds varies, they typically range from £15,000 to £50,000 or even higher.

Many of these funds are held in old-style contracts with outdated charging structures and restrictive fund choices. These could now benefit from a review to ensure they not only meet clients&#39 needs but also have the correct investment mix and performance track record.

There are four key questions that need to be answered when looking at protected rights.

•How does the projected maturity value compare if the client transfers to a modern contract?

•How competitive is the new contract?

•How does fund performance, choice and management style compare?

•Is the client in the correct fund when considering age and risk profile?

If an IFA has a series of protected rights plans they have not reviewed they can certainly help build their business by discussing these now. Remember that many com-panies offer fund-based renewal commission providing a valuable income stream. What to do now?

Approach clients who have contracted out either under an old-style personal pension or contracted-out money purchase scheme and find out if they would like it reviewed.

If they are not an existing client, obtain a letter of authority from the client, or in the case of a Comp, the pension scheme trustee.

Approach the insurance company for details of the current arrangement including:

•Fund value.

•Transfer value.

•Outline of charges.

•Which investment funds are used and what is available.

•Switching options.

•Projected maturity value illustration.

•Confirm that no guaranteed annuity rate applies.

It can be easy to overlook or trivialise the amount of benefit that builds up when a client contracts out. But, with funds in the region of £15,000 to £50,000 or more, it could be time to consider this as a ready-made opportunity.

Protecting your clients building your business

A personal pension allows clients to set up life insurance within their plan. The combined benefits of tax relief, the prospects of IHTfree payouts and the flexibility to alter beneficiaries make this a very attractive option especially for higher-rate taxpayers.

What are the rules?

Clients can contribute up to 10 per cent of their pension premium for life insurance cover. Pension contributions need to be maintained at the appropriate level to ensure the same level of premiums for life cover can be continued.

Other valuable benefits

Inability to work due to an accident, illness or involuntary unemployment can happen to anyone at any time and often without warning. This situation may affect the pension contributions made into your client&#39s pension plan. Payment protection benefits have therefore been specifically designed to protect payments into a pension plan.

More and more companies now allow clients to add valuable benefits to make their plan more attractive such as short-term disability benefit, short term disability and unemployment benefit and long term disability benefit.

These additional protection benefits all pay extra commission. Normally this is calculated as a percentage of the cost of each risk benefit which is chosen and can be as high as 12 per cent of the premium paid throughout the term of the contract. Once again, small gains in isolation but, as these cases grow, so does the value of your business.

Next time I want to look at pension transfers, concurrency and the potential for transfers of income-drawdown cases in payment.


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