I am a director and shareholder in a family business. Myself, my wife, my brother and his wife are members of a small self-administered pension scheme. We are all in our mid to late 50s. Consequently, retirement planning is high in our priorities.
We have all been advised that it would be in our interests to switch to personal pension plans. The advantages of such a move have been explained to us. However, we wonder whether there is a neater way to achieve the same result.
In particular, none of us is happy to fragment the current scheme as we all appreciate the set-up we have had until now.
It has been a long-held opinion of many pension practitioners that, while small selfadministered schemes are superior for funding purposes, personal pension plans are better for drawing benefits.
As a consequence, many families have been advised in the past to take the same steps that have now been suggested to you.
Although the arguments for transferring have usually been fairly compelling – removal of benefit limits, more flexible death benefits and so on – some clients decided against this step. Various reasons have been given by clients, with the following ones being the most frequent:
The need for new parties to become involved.
Having to split the pension scheme so that each member has their own arrangement, with the associated increase in total costs.
The need to cede trusteeship in favour of the personal pension provider.
The result is that scheme members have had to weigh up rather carefully the advantages of either arrangement.
This situation changed suddenly, but rather unexpectedly, nearly 12 months ago when the Inland Revenue announced – as part of its stakeholder reforms – that schemes such as yours would now be able to convert to personal pension-style rules.
Initially, it was thought that this new option would be of little use in practice. However, we have found – and, presumably, so have other practitioners – that small self-administered scheme members like the option of conversion rather than transfer.
Bearing in mind the objections you have raised in your query, I would have thought that converting the scheme would be of interest to you and your co-trustees. This approach would, in particular, allow the current scheme to remain virtually unchanged apart from the execution of a deed to effect their conversion. Following conversion, the scheme would be governed by the normal personal pension rules.
There would still be some disadvantages compared with the current scheme's rules. Briefly, investment restrictions are more onerous for converted schemes. For example, loans are not permitted and neither are transactions between the sponsoring employer and the scheme. Furthermore, investments in unquoted equities are banned.
Thus, the scheme would cease to be a source of finance for the company, be it through direct loans, purchases of company equity or even company assets.
Another potential disadvantage is the possible effect on the tax-free lump entitlements. I would imagine that your current pension advisers have looked at this issue and advised accordingly.
The area of scheme conversions is in its infancy. As a result, there may still be some wrinkles that have not yet become apparent. However, it would seem that it is an option worth pursuing here. Please do let me know if you would like me to look into this further for you.