The new year often comes with a promise of change and resolution. Many will stop smoking, give up drinking alcohol or go on a health kick. But we should also consider the damaging effects outdated legislation will continue to have on pensions.
Pension freedoms brought us freedom and choice but legislation has not caught up with this notion and we seem to be left with outdated rules that do not fit well with the regime.
Some of what remains is restrictive and confusing, which contributes to negative outcomes for the consumer – the exact opposite of what the Treasury is trying to achieve.
If the Treasury is thinking about ways to revamp the rules for the new year, it might want to start with block transfers.
Sometimes known as a buddy transfer, it allows an individual to move to another scheme and retain their protection – specifically, protected tax-free cash or retirement age.
Tax-free cash protection can apply for people who had tax-free cash rights at 5 April 2006 exceeding 25 per cent of their fund on that date. Whereas protected pension age allows benefits to be accessed either before or from age 50. Many famous sportsmen were entitled to the latter, along with a whole host of other prescribed occupations.
To complete a successful transfer, four conditions stand in the way:
- At least two members of the scheme must transfer at the same time to the same registered pension scheme.
- The transfers must be a single transaction made at the same time. “At the same time” does not necessarily mean the funds have to transfer on the same day, as this can prove problematic when moving investments, just as long as they are part of the same overall block transfer transaction.
- All the sums and assets must be transferred fully (meaning a partial transfer would not retain the protection).
- Before making the transfer, the individual must not already have been a member of the registered pension scheme or Qrops for longer than 12 months.
This recipe sounds relatively simple to follow but there are several opportunities for it to spoil.
To start, the saver needs another member of the current scheme who wants to transfer with them to the exact same new scheme, at the exact same time. As you might imagine, this can be extremely challenging to arrange. On occasion, people have been known to artificially create the position by asking friends or family to become a member of their current scheme by contributing a minimal amount for the sole purpose of being their buddy.
Then you have situations where there is simply no one to transfer with – for example, under a Section 32 policy where you have only one member. Some of these schemes do not offer a drawdown facility meaning savers are forced into a retirement option they would not have chosen otherwise.
This leaves clients with a difficult choice: do they stay with their current provider and keep the protection or give it up for potentially lower charges, better investment options and drawdown flexibility?
One of the requirements often overlooked is being a member of the scheme for no longer than 12 months. If you are not aware of this requirement, it can be easy to fall foul of it.
Typically, the application to set up the new scheme will be completed well in advance to ensure a smooth transition but this level of planning and organisation could be to your detriment if any delays are incurred. Especially if an investment takes longer to sell than expected, such as a commercial property, or market conditions are not right to make a sale. Being restricted to 12 months can cause problems.
Instead of a temporary detox, similar to the one we experienced back in 2014 when the rules were relaxed for a year, we should cut out the block transfer requirements altogether.
It makes sense to remove these outdated requirements from the pension landscape. This would keep investors’ finances healthy and simplify pension rules to remove unnecessary barriers for consumers.
Danielle Byrne is technical resources consultant for AJ Bell