Legislation that appears to protect tax-free cash rights greater than 25 per cent could leave policyholders with a much lower lump sum than expected at retirement, according to Norwich Union head of pensions Iain Oliver.He says his new interpretation of the Finance Bill 2006 indicates that occupational pension scheme members and recent section 32 transferees may actually receive tax-free cash of less than 25 per cent of the fund because of the way it is calculated. Oliver says the understanding that tax-free cash was the greater of 25 per cent of the total fund value or any tax-free cash protected under transitional protection arrangements after A-Day appears to be misguided. He says this is because transitional tax-free cash is rec-orded as a monetary amount and then revalued in line with the lifetime allowance of 1.5m rather than as a percentage of the fund. This would mean that unless the client has a pension pot of 375,000 or more, they would receive less than they expect, in many cases massively so, he says. He believes this could be reversed by switching into another pension scheme before retirement but this could incur costs and he warns that advisers who act to protect clients’ tax-free cash rights could face complaints. Oliver says: “It appears as if the industry as a whole has jumped the gun in its interpretation of the rules. We need clarity from the Revenue to see whether we have now interpreted the rules correctly and also how it will react to potential transfers to gain significant tax advantages.” Intelligent Pensions technical director David Trenner says: “The question is, in this situation for clients, do you transfer or do you stay? This is certainly a question that may be causing advisers problems and you have to be very tight on your procedures and tax-free cash calculations.”
Norwich Union and HSBC are the latest companies to enter the pension term assurance market. NU has launched life insurance with tax relief and mortgage life insurance with tax relief on level and decreasing terms. HSBC has launched life cover with tax relief and mortgage cover with tax relief.
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