Dominic Brooks, Winterthur’s Pension Development Manager, examines the additional issues involved when a plan includes a Guaranteed Minimum Pension (GMP) element.

Client options

Our clients’ options are to leave the benefits where they are or move them to a replacement S32, or to a personal pension.  The first problem lies in finding an alternative provider willing to accept the GMP liability as, though there may be one, I am not aware of any provider currently accepting new S32 business that includes GMP. So where does this leave clients? The choice is simple, stay where they are or transfer to a personal pension, lose the guaranteed element and have the tax free cash revert to 25%.

Key considerations – tax free cash

At first sight the option of transferring to a personal pension may appear unattractive – but would the S32 actually deliver what clients expected when they took out the plan?

• Why was a S32 selected over personal pension in the first instance? The reason was often because of the preferential tax free cash position. Before A-Day, on Defined Benefit (DB) transfers to S32, GMP was ring fenced and all non-GMP benefits were available to pay enhanced tax free cash.

• On the other hand, on transfer to a personal pension before A-Day, GMP became protected rights – but so did all post ‘97 DB benefits. As no tax free cash was available from protected rights, this left only the pre ‘97, non-GMP benefits against which tax free cash of 25% could be taken. Post A-Day whilst the rules relating to the S32 remain the same, the personal pension will now allow 25% tax free cash to be paid from the whole fund – including protected rights.

Key considerations – the GMP ‘guarantee’

But what about the ‘guarantee’ that would be given up? GMP involves an absolute guarantee to pay a certain level of benefits at state retirement age. Should there be insufficient funds in a plan, the provider will cover any shortfall. This is undoubtedly true but how will this work in practice? In most instances – but not always the case – GMP and non-GMP benefits are part of the same arrangement. It is only after both the non-GMP and GMP elements have been exhausted to cover the GMP liability that the provider themselves will cover any remaining shortfall.

Why is this point so important? Because tax free cash can only be paid once the GMP has been secured. Will there be any non- GMP benefits left? How much will be left?

The assumptions made many years ago regarding investment returns and the future for annuity rates have not materialised. As a result the funds allocated to cover GMP are generally short. Will the provider be covering this or is your client, unknowingly, effectively providing their own guarantee?

Editor’s Note: We are proud to have Winterthur as new sponsors of The Paraplanner for the rest of the year.

In October last year the BR19 service was pulled for people retiring after 2010.  Good news!  The Pension Service have announced that people who are due to reach state pension age on or after 6th April 2010 can now get online forecasts by visiting here.

As I am sure you know, the State Pension age is no longer 65 for all; it can be anything up to 68 depending on when you were born.  The Pension Service website is a very useful source of information which I use every week.  In particular, they have produced was a simple calculator tool that tells you when you retire as far as the state is concerned.  All you need to do is enter the client’s sex and date of birth and it does the rest for you.  Worth a look here.

Last Friday the DWP published the Governments response to their consultation on SIPPs and Protected Rights. The paper also has useful updates on the Governments thinking on other issues relating to protected rights for defined contribution schemes.The key points are as follows:

1. Protected Rights in SIPPs – The proposed changes to permit SIPPs to hold protected rights will go ahead. They plan to make the final regulations in July with them coming into force from 1 October 2008.
2. Removal of Survivor Benefit Rules - The Government has further considered the survivor benefit rules in light of the joint DWP and HMT review of the OMO for annuities and the various representations on this issue. The Government has concluded that it will be possible to remove the requirement for survivor’s benefit to be provided if an individual who dies with a protected right fund leaves a spouse or civil partner. The intention is to achieve this through the introduction of an amendment to the Pensions Bill. The change will come into force when defined benefit contracting out is abolished and the other rules in respect of protected rights are removed. This is planned for April 2012.
3. Five Year Guarantee Period – The Government currently sees a conflict between the existing regulations (SI 1996/1537) for protected rights permit and Finance Act 2004. This is to be addressed by the final regulations to be made in July with them coming into force from 1 October 2008.

The Finance Bill is already removing the other rules for protected rights when defined benefit contracting out is abolished (expected to be in 2012). From that point it will no longer be necessary to ring-fence protected rights from non-protected rights.

Many commentators (read product providers) expect there to be an increase in the transfer of protected rights funds to SIPPs now that we have clarification on the issue.  Some providers have already begun accepting protected rights funds although the investment is restricted to cash.

Some joy for those approaching retirement amid the doom and gloom that is appearing elsewhere – annuity rates rose 4%  last month according to an article in Financial Adviser.  However, it is not all good news as rates for smokers and those seeking RPI linking remained stable.

The article states that the best rates for level annuities are from Norwich Union with Legal & General most competitive for RPI annuities.  Reliance Mutual provided the best terms for smokers.

This from Money Marketing:

Advisers are outraged by the news that Scottish Widows and Axa do not allow the partial transfer or surrender of pensions if a client has any money invested in restricted commercial property funds.  Earlier this year, providers including Axa and Scottish Widows, imposed withdrawal restrictions on their commercial property funds and these are still in place.

Most pension providers allow the transfer of the part of the pension portfolio which is not invested in these property funds to another life office, but Scottish Widows will not allow it on any contract while Axa will only allow it on certain contracts.

Hargreaves Lansdown head of pensions research Tom McPhail says: “This is so typical of life offices. I do not recall ever seeing this kind of warning on pension arrangements which is why I am so shocked by the whole thing.”

CBK principal Peter Chadborn says he would be put off from recommending both providers to pension clients in the future and says this is not treating customers fairly.

Scottish Widows says it does not have the facility to allow partial transfers while Axa says that different contracts have differing terms and conditions and therefore will not always allow partial transfers.

I don’t know about you but I have seen quite a few TVAS calculations so far this year with only a small minority producing critical yields within the range I would deem to be worthy of consideration for a transfer.  A lot of this has to do with the way in which transfer values are calculated by the scheme actuary and there are yet more proposals in the pipeline now to implement another change.

As usual, Steve Bee of Scottish Life has produced an informative comment on this without being over technical and you can read his BeeLine here.

Steve Bee of Scottish Life is always a good source of insightful and very often amusing comment on pensions. In his latest BeeLine he refers to a very helpful document on salary sacrifice and how it works that has been produced by Her Majesty’s Revenue & Customs (HMRC to the trendy). Having read it myself, I agree that every financial adviser, and of course paraplanner, should read it.

It’s a genuinely helpful document and will be very useful to advisers at a practical level and also, as it is produced by HMRC, has the benefit of being straight from the horse’s mouth, so to speak. It explains the effect of salary sacrifice on State Pensions, benefits and Tax Credits, as well as contribution-based benefits like Incapacity Benefit, Jobseeker’s Allowance, Maternity Allowance, etc. etc.

You can download the document by clicking here.

There are also loads of useful links included in that document.

If this all serves to whet your appetite for the subject you might also want to revisit two ancient BeeLines on the topic which even today, years after their first appearance on the BeeHive, still remain two of the most visited pages on the site. The links to them are here for you:

• Salary Sacrifice
  
• Salary Sacrifice and Child Tax Credits

We are still using salary sacrifice as a tax efficient planning tool especially at bonus times and also tax year end planning in conjunction with input period changes.

Never ones to miss a marketing opportunity, SIPPcentre has produced a SIPP Market Cost Comparison for five case studies where the total SIPP administration costs over the first two years are compared. Other SIPPs included within the comparison are from:

• Standard Life
• Suffolk Life
• Scottish Widows
• James Hay
• Alliance Trust
• Hornbuckle Mitchell

Unsurprisingly, SIPPcentre comes out very well in all five cases which are based on using discretionary fund managers, trustee investment plans and purchasing a commercial property. The analysis shows a huge difference of up to 230% between the cheapest and most expensive.

Cynics could easily argue that the case studies have been chosen to suit SIPPcentre’s charges in order to make them look good. You would not expect them to pick scenarios where they will look bad though!

I would like to have seen a comparison based on investment within their own fund supermarket to see how the total charges compare with those listed above. In my experience, this is how most SIPPs are being used and would be of equal value. However, having tried to do this myself I know how difficult it can be.

SIPPcentre remains one of my preferred providers although I have not yet tried them with a property purchase. Who do you like to use for SIPPs and why – please feel free to add a comment.

Download the comparison by clicking here.

The Annual Allowance is the maximum amount an individual can receive into their pension fund during the current tax year from all sources without a tax charge. For 2007/08 this amount is £225,000. However, when a contribution is made, the policy is automatically set up with an input period of 12 months and this contribution is assessed against the Annual Allowance in the tax year in which the input period ends (i.e. 08/09 and an annual allowance of £235,000).

Therefore if no previous contributions have been made, it may be prudent for an individual to receive a contribution of up to £225k and adjust the input period to end in the current tax year 2007/2008. This utilises the Annual Allowance for the current tax year, and preserves the maximum contribution ability for all future years. This provides the maximum amount of flexibility and contribution potential for future years for some of your best clients.

If the input period is not adjusted, then the amount that can be contributed in 2008/09 is reduced and this years allowance is not fully utilised.

If you are planning to change a client’s input period to maximise contributions, make sure that the provider is able to do this.