subject: The End To Contracting Out [print this page] The End To Contracting Out The End To Contracting Out
The main news story being is the potential impact on clients wishing to transfer benefits from contracted out defined benefit schemes where holding one or both of Guaranteed Minimum Pension (GMP) and contracted out rights I respect of service after 5th April 1997.
At present an individual is able to transfer these pension benefits within the UK to one of:
Another defined benefit contracted out scheme able to accept the existing contracted out liabilities.
A Section 32 buy-out policy able to meet the guaranteed liabilities of the contracted out rights within the transfer value.
An appropriate personal pension or stakeholder scheme or contracted out money purchase scheme where the contracted out liabilities from the original scheme would be converted to and held as protected rights'.
There is currently a draft statutory instrument which will, if enacted, remove the ability for a client to transfer any contracted out rights to a personal or stakeholder pension or contracted out money purchase scheme.
A client would then only have the options of: -
Leaving the pension rights in the current scheme.
Transferring the pension rights to another contracted out defined benefit (final salary) scheme.
Transferring the pension rights to a Section 32 buy-out policy able to meet the guaranteed liabilities of the contracted out rights within the transfer value.
At first glance this may not seem too much of an issue, until that is you consider that:
Few if any Section 32 buy out policies will accept contracted out rights as anything other than protected rights which means that the guaranteed minimum pension cannot be accommodated.
The remaining options for receiving scheme shown above are unlikely to offer pension fund withdrawal or the ability to phase the taking of retirement of retirement benefits.
For pension sharing on divorce, whilst public sector schemes (NHS, LGPS, Armed Forces for example), will offer internal transfer (shadow membership) where the individual receiving pension credits becomes a member of the same scheme, many private sector final salary pension schemes do not offer the option of internal transfer and require that individuals receiving pension credit rights transfer these rights out of the scheme.
Schemes of this nature would include such well known arrangements such as BBC and BT.
This restriction alone will have far reaching consequences for divorcing couples and their advisors and limit the financial planning possibilities for divorce settlements.
Many private sector defined benefit pension schemes have very serious pension funding deficits, if this is coupled with concerns expressed by the member about the sponsoring employer then the restrictions and possible reductions in benefits arising if the employer were to become insolvent and the pension scheme were to fall into the Pension Protection Fund (PPF) require serious consideration.
If it is not possible to transfer deferred pension benefits out of a defined benefit scheme ever again in future then the potential for entrepreneurs to use the value of existing pension benefits for business purposes such as property purchase within a self-invested personal pension or pension loan back within a self-administered pension scheme will be restricted.
Many such individuals may wish to transfer out of their old schemes in advance of the introduction of new rules.
Transferring deferred pension benefits away from defined benefit schemes into personal or stakeholder pensions is no panacea for a guaranteed retirement income. However access to more flexible retirement income options, personal control over the investment of the pension fund and the ability to perhaps use the fund for property purchase or loan backs to your own business can be welcome financial planning opportunities.
Furthermore a personal or stakeholder pension may give improved access to lump sum death benefits, when compared to the options for the existing scheme benefits. This issue becomes more important when protected rights cease to exist post 5th April 2012 as the need to provide income for a surviving spouse or civil partner from that source of funds disappears in favour of a non-tax lump. The non-taxed lump sum option for the personal or stakeholder pension being paid to a discretionary trust also has interesting financial planning opportunities.
If the opportunity to transfer away is limited to the next 16 months there will be a need to undertake a review of your deferred final salary benefits; it will be important to follow proper advice processes and undertake a valid and detailed comparison of the scheme benefits against those from an alternative personal or stakeholder pension before advice is given and before any decisions are made.
What action should you take?
Expert Financial Solutions Ltd are independent financial advisers and Chartered Financial Planners and can advise you on pension transfers, pension contribution strategy as well as alternative wrappers for tax efficient saving for retirement including stocks and shares ISA, onshore and offshore investment bonds, VCT and EIS.
E-mail: info@expertfs.co.uk
Web: www.expertfs.co.uk
November 2010.
Please note that tax and legislation is liable to change in the future. This information is based on our understanding of current English law and HMRC practice. Tax rates and tax reliefs may change in future; the value of tax reliefs will depend on the personal circumstances of the individual and or company.
Expert Financial Solutions Ltd is authorised and regulated by the Financial Services Authority, our FSA reference number is 401295.
