The Inland Revenue put an end to a period of intense speculation when it finally unveiled the personal pension transfer regulations at the end of January. The draft regulations had proved so contentious that the industry was given not one but two chances to comment. So did the lobbying pay off? Well, only in part.
There are some positive changes. If an individual is not subject to certification at present, they will not be in future. Some individuals who require certification at present will also escape under the new regulations.
However, for those individuals who are subject to the new certification rules, the maximum certifiable transfer will be adversely affected if they defer transferring until after April 6. For others, deferral until after then could actually be beneficial.
The ability to transfer from one personal pension drawdown plan to another becomes available for the first time on February 14 although providers may take some time to amend their rules and procedures. The other changes take place on April 6.
At present, certain individuals who transfer from an occupational to a personal pension must obtain a transfer certificate, mainly to stop excessive funds being transferred.
The new regulations alter the categories of people affected. Both the controlling director category and earnings' test apply only to the employment to which the transfer relates.
There was some good news here as the previous draft regulations had proposed that those aged 45 or over earning above 50 per cent of the earnings' cap would be subject to the new test, so the final regulations were somewhat of a relief.
Changes to the
At present, the funding check that actuaries carry out on transfers allows them considerable discretion regarding the assumptions they can use in the calculation. The general approach to be taken is laid out in actuarial guidance note GN11 but this allows actuaries to reflect current market conditions, including their views on likely future investment returns and mortality trends.
However, the new regulations remove the actuary's discretion on the basis of use. Instead, the test must be in accordance with a prescribed formula which is more stringent than under GN11.
Compared with the current typical certification levels, the maximum amount allowable under the new basis could easily be 20 to 30 per cent lower. The new basis prescribes:
A heavier mortality assumption – PA (90) minus two years – than most actuaries would currently view as reasonable.
An excessively high annuity interest rate of 8.5 per cent.
A revaluation rate of 5 per cent up to retirement age.
The assumption that if an individual transfers without a spouse or adult dependant, he or she will remain single until retirement age and hence purchase a single-life pension. This is particularly harsh on those who are recently bereaved or divorced.
Taking these factors together reduces the amount of the fund which can be transferred to a personal pension relative to what could be transferred at present.
The Revenue admits some respondents to its consultation argued that this basis was out of date. However, it is not prepared to change this basis in isolation and any future change would be part of a wider review of the actuarial assumptions used in various pieces of pension legislation.
Transfers from defined-benefit schemes
Special rules apply where an individual is transferring from a defined-benefit scheme subject to the minimum funding requirement. In such circumstances, the trustees must pay a transfer of not less than that determined using the MFR basis.
If the MFR minimum transfer is higher than the maximum allowed under the prescribed basis, then the higher MFR transfer can still be paid to a personal pension.
The MFR basis reflects current market conditions, whereas the prescribed basis does not. This will be of benefit to those transferring at times where market conditions produce a higher CETV.
As most schemes adopt the MFR assumptions in their transfer basis, this is likely to mean the majority of transfers from defined-benefit schemes will not be restricted.
Transfers from money-purchase schemes
Where the transfer is from a money-purchase arrangement, there is no equivalent relaxation and, hence, no relation to current market conditions.
Failing the test
Under current rules, individuals who fail the funding check are barred from transferring to a personal pension. The new regulations suggest that in future, even if the member fails the revised funding check, it may be possible to transfer the maximum certifiable amount in certain circumstances.
However, precisely what these circumstances are is far from clear. For example, there may be a conflict with preservation requirements.
Tax-free cash certificate
Currently, many transferees require a certificate regarding the maximum allowable tax-free cash from the occupational scheme. The ultimate tax-free cash paid from the personal pension is the lower of this amount, increased in line with inflation, or 25 per cent of the fund resulting from the transfer. Such certification may be required even where the individual does not require the transfer certificate discussed earlier.
The final regulations confirm that only those who require a certificate to transfer will require a tax-free cash certificate. Many individuals will gain from this.
Post-transfer death benefits
The regulations also change the rules governing post-transfer death benefits. At present, on transfer from an occupational to a personal pension, the transfer fund must remain separate from other monies. On death before vesting, up to 25 per cent of the transfer fund can be paid as a lump sum, with the remainder used to buy a pension for the spouse. If there is no spouse, the whole fund can be paid as a lump sum.
In future, if at the time of transfer (be it preor post-April 6) the indiv
idual did not fall into either of the new categories for certification, then the whole transfer fund may be taken as a lump sum.
Transfer when in income drawdown
Currently, a transfer from an income drawdown plan is not allowed. The regulations will allow transfers between personal pension income drawdown plans from February 14. Further transfers must be at least one year apart.
Transfers between occupational drawdown plans or between occupational and personal pension drawdown plans will not be allowed, as at present.
IFAs need to identify individuals who are currently well funded and who will be subject to the new test – that is, controlling directors and those aged 45 or above earning above the earnings' cap. Such individuals will need to be advised without delay of the downside of deferring a planned transfer until after April 6.
In the longer term, fewer individuals will be subject to transfer certification, restrictions on tax-free cash and/or lump-sum death benefits. But IFAs should be taking diary notes to carry out full reviews of their high-earning occupational scheme clients well before their 45th birthdays.