I had a similar case with a client of mine recently. Jim, aged 47, had forgotten this scheme existed. It was set up in the early 1980s by a firm where he was employed for five years. His current fund value totalled £3,200, with no protected rights, and he was also being asked for salary information while employed at that firm. He no longer had records going back that far and the firm liquidated in the early 1990s.
Since 1989, Jim had been contributing to a personal pension and had built up substantial funds within his Sipp. He has just set up his own business.
He wanted to know if it was worth transferring such a small amount to his Sipp or if there was another option. The insurance company was only offering the following choices:
At the back of my mind, following my most recent round of pension legislation updates and training, the phrase winding-up lump sum jumped forward.
Logging on to the registered pension scheme manual on the HMRC website showed that Jim fulfilled all the eligibility for this:
“A winding-up lump sum can be paid when an occupational scheme is being wound up and where there is some lifetime allowance available for the member. It can be paid to a member of any age up to 75.
“The amount paid must not exceed 1 per cent of the standard lifetime allowance in relation to the scheme and it is unnecessary to aggregate benefits with other schemes.
“The employer who has made scheme contributions in respect of the member is not making contributions for the member to any other registered scheme and undertakes not to make any such contribution for at least a year from the payment of the lump sum.
“The lump sum is taxable at the member’s marginal rate of income tax but if the member has no previous entitlement under the scheme, then 75 per cent of the lump sum will have pay as you earn (PAYE) tax taken off it. However, this may be reclaimable.”
As Jim had just started his own business, his business plan showed that he would not be drawing any salary for the first year and, after further discussion about the pros and cons of leaving the money invested in the pension env- ironment or withdrawing it now, he decided that, given the amount involved, he would rather invest it personally.
Our next challenge was to convince the insurance company of his eligibility for this. It initially came back and said it was not possible to change the rules as the original employer no longer existed. We challenged this stance and eventually the insurance company wrote to HMRC setting out the circumstances and asked for guidance.
Three weeks later, a revised winding up options form arrived, offering Jim the winding-up lump sum alongside the other options previously stated.
If Jim had not had access to independent financial advice and if his IFA had not kept up to date with pension legislation, he would have missed this opportunity which was the most suitable, given his circumstances.
Yvonne Goodwin is director of Yvonne Goodwin Wealth Management