Pension Transfers – the opportun

Document Sample
Pension Transfers – the opportun Powered By Docstoc
					masterclass on: pension transfer
June 2009

Rob Baillie MSc
Chartered Financial Planner
Pension Business Development Manager

                                   for financial advisers only
• 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

• 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
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

• 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
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
Latest Developments
• Published 5th Feb 2009

• Expands on Review

• Outlines what the reviewers
  looked into

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

• Penalties for poor

• 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

• Provide accurate information – £3,000
protecting pre A-Day cash rights
is tax-free cash greater than 25%

• VULSR x 100

• VULSR = value of uncrystallised lump sum rights on
  5 April 2006 (must not exceed maximum permitted

• 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
• HMRC maximum remuneration = £75,000

  VULSR = 20 x £75,000 x 1.5 = £90,000

  VUR   = 20 x £60,000 x 20 = £400,000

  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
 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

Scheme   Fund       Lump        Lump       Required Reduction               Final Lump Sum         % of
         Value at   Sum         Sum as %                                                           fund
         5/4/06     entitleme   of fund
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
Mr A’s DB pension
summary funding statements
• All members*
• Annual, 22 September 2006
• Statutory funding – ongoing
• Solvency funding – buyout
• Seek advice from financial

*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

                       • 31,000 individuals with
                         protected benefits

                       • £675 million levies for
    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
main functions
                 • Pays pension and fraud

                 • Manages levies

                 • Invests the funds
takes over
             • Defined benefit schemes

             • Insolvency event

             • Insufficient assets to cover
               pension protection fund
               (PPF) levels of

             • Assessment period
Pays compensation
100% of compensation to members
                   • Beyond NPA receiving

                   • 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

                    • Limited by compensation
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

                     • 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

• 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

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

• Transferred funds must be held separately from any
  other funds the pensioner has under the receiving

• 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
• 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

phased drawdown – designation
                                 pension years
                             1   2    3      4   5   review
tax-free      crystallised
  cash            fund

phased drawdown – designation
                                                 pension years
                                             1   2    3      4   5

                                                                     Five-year review
tax-free            existing
  cash              crystallised
tax-free            crystallised
  cash              fund                         2     3     4   5

phased drawdown – designation
                                        pension years
                                    1   2    3      4   5

                                                            One five-yearly review
tax-free      funds
                                        2    3      4   5
tax-free                                            4   5
phased drawdown – separate arrangements
                                  pension years

tax-free   crystallised   1   2    3     4        5
  cash         fund

phased drawdown – separate arrangements
                                          pension years

           crystallised   1       2        3       4       5       Review plan 1

tax-free   crystallised       1       2        3       4       5   Review plan 2
  cash         fund

phased drawdown – separate arrangements
                                          pension years

                          1       2         3       4       5       Review plan 1

           crystallised       1       2         3       4       5   Review plan 2

tax-free   crystallised
                                                1       2       3      4     5
  cash         fund
                                                                        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
• Other estate
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

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.

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)

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.

Shared By: