View more on these topics

Sweet and low

O&M Systems director Jason Wykes asks just who is the customer that needs to be treated fairly – the employer who pays a benefit consultancy to encourage members to leave a DB scheme or the member who is about to give up valuable retirement benefits for a flat-screen TV and an unexpected tax bill?

The growing practice of employers offering a cash inducement to deferred members of final-salary pension schemes to transfer out is finally getting attention from The Pensions Regulator and the FSA.

Are all these sweeteners a bad thing and should advisers steer clear?

It is fair to say that the majority of such offers are simply not good value.

The employer is hoping the dangled carrot of cash in the pocket will entice members to lose all reason and accept any offer on the table.

The covering letters to scheme members are often provocatively written and this is an area where the scheme trustees and The Pensions Regulator should look very closely.

For example, the letter issued in December 2005 by PWC to members of the Harland and Wolff scheme made shocking reading, with comments including “Transferring to a personal pension arrangement can provide opportunities… including taking a tax-free cash sum” (they did not mention that the scheme can also pay a tax-free cash sum) and “The employer has limited resources so the top-up…will only be available on a first come, first served basis…”

It is unfortunate that some commentators are suggesting that IFAs must resist the option of providing advice on these bribes. Surely, this is not the answer.

Scheme members need to understand the true value of the benefits they are giving up and this is precisely why IFAs must provide advice to their clients or at least point the client to where they can get advice.

The trend among big IFA firms I have spoken to is a big increase in the number of clients seeking advice in this area, with the percentage of positive transfer recommendations being considerably less than 20 per cent of cases.

This is good as it means that the members are being given clear, independent advice about the value of their benefits, including, in most cases, the likely benefits offered by the Pension Protection Fund).

The advice, however, is not always cut and dried. One employer my IFA firm dealt with recently paid us a fee to advise the 20 or so deferred members of the scheme on an enhanced transfer value offer. The critical yields on these cases were in the range of 3 per cent to 5 per cent, so even the cautiously minded individuals were interested in pursuing a transfer.

On the other hand, we are advising 40 members of another scheme where we have only recommended a transfer to two of them.

As with all advice issues, we need to look at each client individually rather than tar the entire issue with the same brush. Some of the offers merely top-up the already low MFR-based transfer value while other offers go some way towards the true buyout cost of the benefits.

Another contentious issue is on taxation of the cash inducement. Currently, it appears that HMRC is leaving this down to each inspector of taxes as the central pensions office in Nott-ingham has declined to provide any clarity.

Referring to the PWC letter to Harland and Wolff members, it said the cash payment “would not be subject to income tax but would be treated as a capital gain.”

The Federation of News-agents’ scheme said it would need to deduct basic-rate tax before making any such payment while many others are suggesting it will be completely tax-free.

This raises three issues: First, shouldn’t the tax basis be the same for all schemes? (that is, HMRC centrally makes a policy decision). Second, as a taxpayer, I would have to ask why this should be considered tax-free? Third, the tax-free status is based upon the employer’s discussion with their local inspector of taxes.

Most deferred members, who, by definition, are generally no longer employed by the company, will probably be looked after by a different tax office – that of their new employer. Under self-assessment rules, surely it is down to the individual to tell their local tax office and hope they agree on the tax- free status – a high-risk strategy.

If the authorities want to dampen down these incentives, the easiest way is to apply income tax on any cash sums paid. No one likes to pay tax. But it is also becoming clear from the DWP that it may be looked at as a wilful deprivation of benefits when assessing benefits on retirement.

The positive effect of this would be for more sweeteners to be offered as enhanced transfer values rather than cash that will not be around at retirement.

Another interesting angle in this area is where the employer hires a big benefit consultancy to offer generic advice to members. This is better than no advice at all but the definition of advice is blurred. Members feel they have been given advice while the benefit consultancies point to the small print and say they merely provided information.

The fact that a stakeholder plan application form is often enclosed with the “advice” only serves to muddy the waters. The water gets no clearer when you introduce TCF into the equation.

Just who is the customer that needs to be treated fairly – the employer who pays a fee for the benefit consultancy to encourage as many members as possible to leave the scheme, or the member who is about to give up valuable retirement benefits in exchange for a flat-screen TV and an unexpected tax bill after the event?

It should become increasingly clear that advice is needed for scheme members but the issues involved are complex. Most advisers should refer the client to a specialist every time.

It will be interesting to see whether the guidance being drafted by the regulators will help to clarify any of these issues. From my discussions, I fear that the guidance will be so vague as to be of little value. As usual, everyone, including the regulators, wants to cover their backs. This does not bode well for the future of the industry, nor help to regain public confidence.


‘IFAs need style counsel’

Fidelity says rapid growth in the multi-manager market has led to different product types, which means IFAs need more information on how these strategies work. The firm says multi-man-ager has become a “must- have” product and its latest research shows that 82 per cent of advisers are using multi-manager products. Fidelity sets up its first […]

Yorkshire BS appoints new chair and vice-chair

Yorkshire Building Society has appointed Ed Anderson as chairman and Richard Davey as vice chairman.Anderson, who is currently vice chairman, will succeed Christopher Sheridan when he steps down at the end of the year.Anderson was appointed to the Board in May 2003 while Davey joined the board in September 2005.Sheridan says: “Since joining the Board […]

Fund firms call for investment limit to be inflation-linked

Fund managers have welcomed the Government’s decision to keep Isas but are calling for the annual investment limit to be inflation-linked. Fidelity, Invesco Perpetual and F&C say the annual investment limit has decreased significantly in real terms since it was set at 7,000 in 1999. According to Office of National Statistics figures, if the annual […]

Taking the bite out of Asps

Winterthur Life pensions strategy manager Mike Morrison says with compulsory annuitisation largely discredited, the Government should look to revise rather than abolish Asps and investors should be prepared to accept reasonable extra taxes on the new vehicles

Converting pension savings to a retirement income…

Since last year’s reforms to pension legislation, a significant number of retirees have chosen income drawdown over purchasing an annuity. Income drawdown is more flexible than an annuity. However, it also increases the likelihood that individuals won’t be able to maintain their income throughout their lifetime. In this short video, we explain the risks that […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm