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The complexities of simplification

Axa Wealth head of technical consultancy Andy Zanelli discusses the importance of advice as protected rights restrictions are lifted

The pace of change in 2012 is showing no signs of letting up. The first three months were a maelstrom of activity as many of us were heavily involved in helping clients decide on an appropriate course of action with regard to fixed protection while at the same time awaiting any unforeseen Budget announcements.

As that new aspect of complex pension legislation came into effect, it was a poignant time for me as on the same date, there was a simplification in the form of the abolition of protected rights. It was poignant in that when I started in the industry nearly 25 years ago, contracting out was all the rage.

The popularity and widespread use of contracting out, particularly in the earlier years, has led to many millions of pension assets being held as protected rights. These assets would have been held separately as protected rights benefits either in the same or a separate policy due to the specific legislation governing the benefits that had to be paid in different circumstances.

Simplification of pension legislation is a good thing, however, it does bring with it some added complications for the adviser and the client as the loss of protected rights creates a need for a review of many aspects of overall pension planning.

One of the first considerations is, how are the protected rights benefits held? Older style “rebate-only personal pension” schemes could be more highly charged than the modern, flexible personal pension or Sipp we use today. There could also be benefits in ease of administration, increased investment choice, access to additional flexibility, drawdown and other options not traditionally available in the older policy structures.

Many schemes are set up with the non-protected rights and protected rights benefits held in separate arrangements or even separate schemes.

It is worth understanding any consequences of this. For example, are the separate funds considered as a whole for drawdown minimums? Are the charges considered across the whole value? Are all the options available due to the size of each arrangement? Does this allow a smooth transition to drawdown in the future or will the client get multiple sets of paperwork and different review dates?

The move to drawdown needs careful planning when faced with separate arrangements or schemes. Consolidation of drawdown plans involves a degree of complexity so should be considered prevesting to try and avoid potential problems later on.

For many clients, it will be worth reviewing expectations for retirement and the form of annuity that they will look to use at crystallisation. If the planning has been expectation-led, based on the annual review documentation, illustrative figures of protected rights pots had to take into account a 50 per cent spouses pension and a level of escalation.

Is this the right benefit for the circumstances? Is the client single? Has their spouse provided an adequate pension of their own or should it be reviewed?

The flexibility in the shape of the emerging annuity has changed considerably, even to the extent that a small window of opportunity may exist this year as it no longer needs to reflect unisex rates. We must wait and see what tangible effects the Test-Achats case will have on this.

A lot of advice centred around occupational pension schemes may need to be reviewed as many rebate only personal pensions were set up to run alongside executive personal pensions, small self-administered schemes and contracted-in money purchase schemes which did not or could not accept rebate payments.

No restrictions should exist now so why not bring the benefits together?

Another big area for review is the many section 32 policies that still exist, a large proportion of which were recommended due to the better death benefit position over personal pensions at the time.

If the client affected the transfer to a s32 because of the way the death benefits would be paid rather than have them emerge from the personal pension as protected rights funds, then it may be worth a review as the restrictions have dropped away.

Another major area is death benefits. Many policies would have been written with an irrevocable “expression of wish” which may or may not refer specifically to the protected rights portion due to potential inheritance tax issues. This document may no longer be valid after April 6, 2012.

If a fund had non-protected rights directed to the spouse, with any protected rights to the children, the question must be, what will happen to the ex-protected rights funds? Will it all go to the spouse, with potential IHT consequences?

Will the kids now get nothing, which was not the original intention? Will the ex-protected rights funds become subject to the discretion of the trustees which could significantly delay payment as they fulfil their duty around discovery of potential beneficiaries? It is time to review.

There are other areas where the abolition of protected rights changes the planning put in place, some more niche than others.

For example, anyone using a money-purchase scheme pension may not have been allowed to utilise any protected rights funds for this purpose, a phased retirement strategy could have been restricted to the use of drawdown for some tranches and now secured pension is an option.

Some borrowing calculations for property purchase excluded protected rights funds but now if the ex-protected rights fund is in excess of the lifetime allowance, it can be paid as a lump sum less the 55 per cent tax charge. Prior to April, it would have to be paid as an income with a 25 per cent tax charge and taxed in the hands of the individual.

These are just a few additional examples.

So, is this in fact a simplification of the current pension regime? As with anything to do with pensions, it is never that simple when you get down to the effect this could have for any one individual. One thing remains constant – the client will always need quality advice.

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