masterclass on: pension transfer June 2009 Rob Baillie MSc Chartered Financial Planner Pension Business Development Manager for financial advisers only agenda • Background • Money purchase to money purchase • Protected tax-free cash • Transfers from multiple schemes • Defined benefit (DB) transfers • Drawdown transfers Mr A • Ex Director – 58 years, married with two children • No intention of returning to work, but may do some consultancy • Needs to ensure ‘a continuing income stream for the rest of my life, and protection of my wife’s income if I should die before her’ • Would like his pension assets ‘tidied up’ Mr A’s pensions • Final Salary Scheme • Two executive pensions plans (EPPs) with protected tax-free cash (TFC) • Section 32 • Income drawdown via personal (PP) recognised transfers (between UK schemes) • Do not affect Annual Allowance • Not a benefit crystallisation event – no impact of lifetime allowance – although could be detrimental to transitional protection. • Do not have to be reported to HM Revenue & Customs (HMRC) automatically • Partial/Split transfers of uncrystallised rights are allowed money purchase to money purchase transfer considerations • Retirement annuity Contracts (s226) and personal pensions (PP) • Guaranteed annuity rates • Benefit and investment flexibility • Penalties • Charges • Death benefits money purchase critical yield calculator FSA pension switching report • Report published December 2008 • Summarises findings of thematic review • Looked into quality of advice • Overall FSA unimpressed • 1,500 invites (summons) to FSA seminars being sent out FSA switching • A quarter of firms – no cases assessed as unsuitable sales • A quarter of firms – unsuitable advice in a third or more of cases sampled • Overall the FSA assessed advice to be unsuitable in 16% of the 500 cases sampled main reasons for unsuitable advice • The switch involved extra product cost without good reason (79% of unsuitable cases) • Funds recommended were not suitable for customers attitude to risk and personal circumstances (40% of unsuitable cases) • Adviser failed to explain need for, or put in place ongoing reviews when necessary (26% of unsuitable cases) • The switch involved loss of benefits from the ceding scheme without good reason (14% of unsuitable cases) Good & Poor Practice: loss of benefits When recommending switching from a pension with a GAR (for valid reasons which benefited the customer) one firm would quote the current market annuity rate alongside the guaranteed annuity rate (on a like-for- like basis) in the suitability report. This helped the customer understand the value of the GAR. The adviser did not adequately consider the nature of the existing with- profits policy. The policy included a significant guaranteed sum assured and also a GAR. The with-profits fund was highly rated. The new pension would have had to provide a net return of over 5% per annum just to match the scheme’s existing guaranteed benefits, ignoring any future bonuses. Good & Poor Practice: explaining & providing ongoing advice One firm had a very clear explanation in the template suitability report describing why ongoing reviews and rebalancing were needed for their portfolios (where an asset allocation approach had been recommended). Their standard service for customers also incorporated a full annual review and biannual rebalancing. Many firms had not clearly established the risk of investments becoming unbalanced over time without readjustment back in line with the customer’s risk profile, and had not explained this to customers. Although in most cases advisers had ongoing relationships with customers, it was not clear that these arrangements addressed the issue of rebalancing on a consistent basis. Good & Poor Practice: cost comparisons The firm set out a section in its template suitability report outlining any switch penalties on the ceding scheme and clearly explained the impact of charges of the switch. They did this by comparing the reduction in yield (RIY) figures for the ceding and new scheme (they used a software system to calculate the RIY of the ceding scheme). The firm also had guidelines around the level of additional charges that were considered acceptable and although these could be exceeded, this could only be done with head office agreement. Another firm had a similar process but used projected fund values instead of RIY figures. Good & Poor Practice: cost comparisons The firm included a table in its suitability reports setting out and comparing the projected retirement fund value from the ceding scheme and the new scheme. These typically showed that the new scheme had lower charges. The advisers indicated that the new scheme involved lower costs and therefore this formed part of the reason for switching. However, the projection of the new scheme was often on the basis of 100% investment in a cash fund (which had no charges) where the fund was to be managed by a discretionary fund manager. The projections left out the cost of the discretionary management service and any underlying funds. Therefore the comparative table and the advice were misleading. Good & Poor Practice: matching the recommendation to the customer’s ATR & personal circumstances The firm used a risk profiling tool to make an initial assessment of the customer’s ATR. They then used a stochastic modelling tool to create a series of model portfolios, with the individual funds selected by an independent fund research company. Although systematised, the approach was not used as a ‘black box’ – the tools were used as a basis for discussion and the process was adapted, when merited, for individual customers. Good & Poor Practice: matching the recommendation to the customer’s ATR & personal circumstances The customer had previously been invested in with-profits and property funds and originally had a low/medium ATR. The file recorded that the customer now wanted to take a medium/high risk approach to investment in order to achieve better returns. The adviser recommended a new pension investing in ten different external funds, all equity-based. The selection included 60% in specialist and overseas funds and a further 30% in more adventurous UK equity funds. We considered this fund selection to be too high risk for this customer given that they intended to retire and take benefits in around five years. FSA action • Measures to address each firms failings and address unsuitable sales • Several firms subject to enforcement investigation as a result of significant failings • Writing to 4,500 firms responsible for majority of pension switching asking them to consider past and future sales in light of the review and take remedial action • Series of firm visits in 2009 and desk based file reviews – to assess if firms have taken sufficient action following the review Latest Developments • Published 5th Feb 2009 • Expands on Review • Outlines what the reviewers looked into • http://www.fsa.gov.uk/Page s/Library/Other_publications /pension_switching/index.sh tml Skandia’s process • Rigorous risk assessment • Tailored asset allocations Advisers tailor • Portfolio construction entry point to suit their model • On-going review & management transfer considerations – EPPs post a-day • Scheme administrators required • Penalties for poor administration • Multiple EPPs • Lack of required facilities • IHT changes to SSAS scheme administrator role • Reporting to HMRC • Annual returns • Accounting for and paying tax • Providing members’ annual statements • Maintaining records, event reporting and provision of information for up to six years penalties for failing to… • Submit a quarterly accounting for tax form – £100 • Keep records for six years – up to £3,000 • Report an event – up to £300, plus £60 for each day late • Provide accurate information – £3,000 protecting pre A-Day cash rights is tax-free cash greater than 25% • VULSR x 100 VUR • VULSR = value of uncrystallised lump sum rights on 5 April 2006 (must not exceed maximum permitted pension) • VUR = Value of uncrystallised rights scheme protection example • 2 EPPs worth £250,000 at A-Day, with £130,000 tax-free cash protected • Crystallised in 2010/11 tax year when worth £350,000 • Protected cash is revalued by 20% to £156,000 • Add 25% of difference between final value and A-Day value, increased by 20% • £156,000 + (25% of £50,000) = £168,500 • Non-protected: the maximum is £87,500 DB TFC example • At A-Day Mr A had 20 years service with a scheme accrual of 1/60 and pensionable salary of £60,000, and five years from scheme normal retirement age (NRA) • HMRC maximum remuneration = £75,000 VULSR = 20 x £75,000 x 1.5 = £90,000 25 VUR = 20 x £60,000 x 20 = £400,000 60 VULSR = £90,000 = 22.5% VUR £400,000 EPP apportioning TFC • Mr A has two EPPs in respect of same employment, Fund values £150,000 and £100,000,maximum TFC for employment up to 6 April 2006 was £130,000 • Post A-Day TFC must be calculated separately for each scheme Scheme Fund Value at 5/4/06 Lump Sum entitlement EPP1 £150,000 £130,000 EPP2 £100,000 £100,000 (capped to fund value) Total £230,000 EPP apportioning TFC • Total aggregate TFC of £230,000 is greater than HMRC maximum of £130,000, by £100,000. • TFC must be proportionately reduced across all schemes Scheme Fund Lump Lump Required Reduction Final Lump Sum % of Value at Sum Sum as % fund 5/4/06 entitleme of fund nt EPP1 £150,000 £130,000 86.67% £100,000 x £130,000 / £230,000 £130,000 - £56,521 = 48.9% = £56,521 £73,479 EPP2 £100,000 £100,000 100% £100,000 x £100,000 / £230,000 £100,000 - £43,478 = 56.5% = £43,478 £56,521 protected tax-free lump sums • Protection is scheme specific • Lost if transferred to another registered scheme • Unless: – Block transfer – Wind up into deferred annuity contract scheme specific TFC – block transfer • One transaction • More than one member of same scheme • To the same recipient scheme • Within a reasonable timeframe • Member cannot have been a member of receiving scheme for more than a year before the transfer, unless relates to contracting out payments only scheme specific TFC – wind-up • Transfer to a deferred annuity contract (S32) • As part of the winding up of an OPS • Access to USP (subject to product minimums) • Section 32 to 32 transfers transfers from multiple schemes two or more protected tax-free lump sums • Pension schemes can only hold one protected tax free lump sum (TFLS) • Where two schemes are held with protected TFLS, they cannot be consolidated without protection being lost. • Only the first protected lump sum is maintained consolidation – at a price • Creates necessity of holding transfers in separate registered schemes but on one investment platform • Skandia Group has personal pensions (Skandia and Selestia), SIPPs, EPPs and S32 contracts available to provide solutions, with USP available on all • May need to use mixture of ‘block transfers’ and scheme wind-up rules to achieve protection of lump sum and retirement flexibility phased retirement loses protection • Protected cash can only be paid when member first takes benefits and all benefits taken at same time • If benefits taken at different times – protection lost, regardless if taken from original or another plan (ie post block transfer to PP) • Does not apply if registered for primary or enhanced protection Mr A’s DB pension summary funding statements • All members* • Annual, 22 September 2006 • Statutory funding – ongoing basis • Solvency funding – buyout • Seek advice from financial advisers *Schemes with less than 100 members only need to report three yearly after a full valuation Mr A’s scheme • Assets £214 million • Technical provisions £354 million • Statutory funding level 60% • Solvency funding 46% • Recovery plan £10 million per annum over 10 years the pension protection fund • Effective from April 2005 • Statutory fund run by a Board • 31,000 individuals with protected benefits • £675 million levies for 2008/9 the pension protection fund • 148 schemes have now completed assessment, of which 100 have transferred to the PPF • 31,191 people are receiving PPF compensation, or will receive compensation when they retire • The PPF pays out an average of £4 million a month in compensation. The average yearly compensation is £4,700 per person • The oldest recipient is 101 and the youngest is six years old • The PPF now has a total of 290 schemes with 178,904 members in assessment periods. *as at 31 March 2009 Source: PPF website www.pensionprotectionfund.org.uk/news main functions • Pays pension and fraud compensation • Manages levies • Invests the funds takes over • Defined benefit schemes • Insolvency event • Insufficient assets to cover pension protection fund (PPF) levels of compensation • Assessment period Pays compensation at… 100% of compensation to members • Beyond NPA receiving pensions • With ill health early retirement pensions • With survivors pensions • Beyond NPA not yet drawing benefit 90% compensation… • Before NPA • Combination of scheme rules and PPF rules • Age adjusted cap on benefits (NAE indexed) • Up to 25% tax-free cash commutable • Limited by compensation cap PPF cap for 2009/10 Age 90% 60 £26,031 90% of compensation cap for members before NPA 61 £26,496 62 £26,994 63 £27,527 64 £28,098 65 £28,742 SOURCE: GAD tables April 2009 limitations of PPF • Revaluation in deferment • Limited price indexation (LPI) on post 97 accrual only • Survivors benefits 50% of members PPF • No transfers • Not all schemes covered the pension protection fund • Skandia TVAS reports • Details PPF protection • Illustrates comparative critical yield defined benefit transfers Deferred members of defined benefit schemes, the case for a transfer transfer process • Fair value? • Member suitability occupational pension schemes (OPS) – right to a CETV • OPS – Right to CETV after three months qualifying service • Right to preserved benefits only applies after two years qualifying service • Legal right only applies to members who leave a year before their normal pension age Employer covenant • Employer covenant • Scheme funding position • Summary funding statement • Statutory and Solvency Limits of the PPF • Limits of the PPF • Caps on benefits • Cash equivalent transfer value Discount rate • Discount rate • Discretionary benefits TVAS Report • Transfer report/critical yield personal issues Need to secure income? Attitude to risk Need for flexibility Dependants’ benefits Health recent developments OPS (transfer values) (amendment) regulations 2008 • From 1 October 2008 • Trustees responsible for method and assumptions to be used in calculation – no actuarial certification! • Set minimum level for calculation of CETV – best estimate of expected cost • Financial assumptions – regard for investment strategy • Trustees can scale back CETVs if scheme underfunded – ‘insufficiency report’ from Scheme Actuary pension bill • Personal Accounts • Cap accrual rates for deferred members - LPI drawdown transfers drawdown to drawdown transfers • Single set of rules covering both OPS and PP • No restriction on when or how often transfers can be made • Transferred funds must be held separately from any other funds the pensioner has under the receiving scheme • Pension year, income limits and income reference date is carried over unchanged into receiving scheme information requirements • The pension year • Income limits • Income already taken in the current pension year • The next income review reference date • Date the funds moved into unsecured pension (USP)* • Amount originally moved into USP* • Full details of any of the USP fund that was already in income drawdown prior to 6 April 2006* *Required to carry out the second benefit crystallisation test at 75 or on buying an annuity, if earlier Phased Retirement and top ups phased retirement • Lifetime annuities • Income Drawdown • Aims to provide – Greater control over investment and timing – Greater death benefits – Option of ASP phased retirement - designation / top-up ? • Personal Pension structure determines how phasing works • Process for multi-clustered plans differs from single arrangements phased retirement (Designation) • Reference dates and pension year do not change • Upper income limit for the whole USP must be recalculated immediately every time pensioner moves new part of his fund into USP • Income calculation must be done on day funds move – NO 60 day window • New upper income limit takes effect immediately and replaces the upper limit for the current pension year phased drawdown – designation personal pension phased drawdown – designation pension years 1 2 3 4 5 review tax-free crystallised cash fund uncrystallised fund phased drawdown – designation pension years 1 2 3 4 5 Five-year review tax-free existing cash crystallised fund Re-base income newly tax-free crystallised cash fund 2 3 4 5 uncrystallised fund phased drawdown – designation pension years 1 2 3 4 5 tax-free One five-yearly review cash existing crystallised tax-free funds 2 3 4 5 cash Re-base income newly tax-free 4 5 crystallised cash fund phased drawdown – separate arrangements pension years tax-free crystallised 1 2 3 4 5 cash fund uncrystallised fund phased drawdown – separate arrangements pension years crystallised 1 2 3 4 5 Review plan 1 fund tax-free crystallised 1 2 3 4 5 Review plan 2 cash fund uncrystallised fund phased drawdown – separate arrangements pension years 1 2 3 4 5 Review plan 1 crystallised fund crystallised 1 2 3 4 5 Review plan 2 fund tax-free crystallised 1 2 3 4 5 cash fund Review plan 3 advice issues • Transfer which pensions? • Phase benefits • USP and alternatively secured pension (ASP) income levels • Potential for contributions • Income needs • Gifts from normal expenditure • Other estate skandia This presentation is designed for and directed at professional financial advisers. It should not be relied on by consumers. This presentation is based on Skandia’s interpretation of the law and HM Revenue & Customs practice as at June 2009. We believe this interpretation is correct, but cannot guarantee it. Tax relief and the treatment of investment funds and trusts may change. The value of any tax relief will depend on the investor’s individual circumstances. Investors should be aware that the value of units can fall as well as rise. The value of investments may fluctuate as a result of market and currency fluctuations and are not guaranteed. Skandia does not accept any responsibility for any losses or liabilities arising from actions taken or omissions as a result of the information contained in this presentation. Further details of the Skandia Group products can be obtained from the appropriate Technical Guides which are available from any Skandia Group office. www.skandia.co.uk Calls may be monitored and recorded for training purposes and to avoid misunderstandings. Selestia Investment Solutions investment platform gives you access to an ISA and Collective Investment Account provided by Skandia MultiFUNDS Limited, a Collective Retirement Account and Collective Investment Bond provided by Selestia Life & Pensions Limited and an Offshore Collective Investment Bond distributed by Skandia MultiFUNDS Limited for Old Mutual International (Guernsey) Limited. Skandia fund platform gives you access to MultISA and MultiFUND provided by Skandia MultiFUNDS Limited and to products provided by Skandia Life Assurance Company Limited. Skandia Life Assurance Company Limited, Skandia MultiFUNDS Limited, Skandia Investment Management Limited and Selestia Life & Pensions Limited are registered in England & Wales under numbers 1363932, 1680071, 4227837 and 4163431 respectively. Registered Office at Skandia House, Portland Terrace, Southampton SO14 7EJ, United Kingdom. All companies are authorised and regulated by the Financial Services Authority with FSA register numbers 110462, 165359, 208543 and 207977. VAT number for all above companies is 386 1301 59. Old Mutual International (Guernsey) Limited is regulated by the Guernsey Financial Services Commission and is licensed to write long-term business under the Insurance Business (Bailiwick of Guernsey) Law 2002. Registered number 2424. Registered Office at Fairbairn House, PO Box 121, Rohais, St Peter Port, Guernsey GY1 3HE, Channel Islands.