ilp There are also some adviser requirements:
• Advisers will have to be independent and authorised by the FCA.
• DB transfers of £30,000 or more where benefits are being accessed must be dealt with, or checked by, a pension transfer specialist.
• Advisers will need to know the individual’s personal and financial circumstances, together with their attitude to risk. • Advisers should carefully compare all the benefits that are being given up in the DB scheme with those gained in the new DC scheme.
• Advisers may consider the DB scheme funding level and whether any benefits and the transfer value may be reduced. It could be relevant to take into account the financial position of the sponsoring employer.
• The advantages and disadvantages of both types of scheme.
A DB to DC pension needs careful consideration and documentation. In most cases it will be more beneficial in the long term to stay in a DB scheme rather than transfer. This is the opinion of the FCA, providers and advisers. DB schemes are often referred to as ‘gold plated’ pensions. However, the opportunity to take advantage of the new pension reforms is likely to alter the balance in this debate as the increased flexibility is only available on DC schemes.
Trustees
DB scheme trustees have a duty to act in the members’ best interests. When considering transfers they must balance the interests of both the members wishing to transfer and those that wish to remain in the scheme. Trustees will have to ensure that processes are in place to:
• Implement a likely increased number of transfers in a timely fashion and in accordance with legislative deadlines. Trustees can apply to TPR for an extension if needed.
• Maintain accurate records.
• Support members in a number of ways to make fully informed decisions. • Monitor and understand demand for transfers and the subsequent impact those transfers could have on scheme funding. If necessary, the trustees should consider requesting an insufficiency report and instructing (a potential) subsequent reduction in transfer values. • Ensure that appropriate independent advice has been taken where the transfer value is £30,000 or more. The trustees do not, however, have to concern themselves with the actual advice given. • Conduct proper due diligence on the receiving scheme to ensure that it is a legitimate arrangement.
• Ensure members are kept informed of legislative and scheme changes.
For full details of the actions and processes identified by The Pensions Regulator, visit
www.thepensionsregulator.gov.uk/docs/db- dc-transfers-conversions-consultation.pdf.
Case study 1
Max is 58, widowed and works a few days consultancy each week. He has two grown up sons: one has prospered, has a good job and lives with his wife and children in a nice house; his other son, while enjoying life, has not found things as easy. Max was employed throughout his working life in the investment world and enjoyed high pay and benefits. As a result, he has considerable investments.
Max has been thinking about his deferred DB pension, payable from age 65, although he could take it early subject to an early payment charge. He is concerned that once it becomes payable the benefit will be lost upon his death as he does not have a widow; he wants benefits to pass to his two sons.
Ideally, Max would like to pass some cash benefit to his sons; Max plans to use his investments to fund his own retirement but does not want to bite into any of the capital that is tied up. Max’s part-time consultancy currently provides the income he needs and this is likely to continue for a number of years.
An option would be for Max to transfer his DB scheme benefits to a DC arrangement. This would then allow him to take 25% as a tax- free lump sum to pass to his sons and leave the remaining balance invested. Nominations can be arranged so that upon Max’s death the remaining funds should pass to his sons free of tax if death occurs before age 75.
Max consults his adviser, who is fully aware of his personal, family and financial situation as well as his existing inheritance planning. The adviser carries out a full review of the DB scheme and prepares a report that includes a TVA. In most situations it is more beneficial in the long term to stay in a DB scheme rather than transfer, but in Max’s case the outcome is not so clear cut. The issue of the death benefit is the crux of the matter and on balance, the adviser recommends that Max should transfer to a SIPP. The size of Max’s other significant investments helps the adviser come to this decision. The transfer is initiated after 5 April 2015 and Max shares the 25% tax-free lump sum between his sons, leaving the rest of the balance invested in a low-cost SIPP.
Case study 2 Tanya is 55 and divorced with two grown up children. She has a small mortgage of £5,000 but also has £15,000 of credit card debt from the period following her divorce. It is this debt that she is struggling with as otherwise Tanya is financially sound with a full-time job. Her two non-dependent daughters both have jobs but are finding it impossible to move from rented accommodation onto the property ladder.
Tanya has little in the way of investments but has a deferred DB pension with a £98,000
transfer value. The pension is payable at age 62 with a significant penalty for early payment. At the time of divorce both parties had similar pension benefits and therefore no judgements were made against these.
Tanya is fully aware that the starting position for DB pensions is that in the long term it is generally more beneficial not to transfer, but she is aware that when her elderly parents die she, as the only child, will inherit their house. As her parents are asset rich, cash poor, they are unable to provide any immediate help.
Tanya is desperate to pay off her mortgage and credit card debt and to help her children get onto the property ladder. Her first step is to seek advice from a professional adviser specialising in pensions. The adviser meets with Tanya to gain a full understanding of her personal, family and financial situation. He also seeks information from the defined benefit scheme as to its funding position and whether the TV has been reduced.
The adviser feels that by taking advantage of the pension reforms Tanya may be able to achieve her aims but this would need careful thought and analysis. However, the adviser also points out that if she were to die before or after she took any benefits from the DB scheme, her children would not receive any lump sum or pension. This concerns Tanya.
By transferring the £98,000 to a DC scheme Tanya could take a tax-free lump sum of £24,500. This would allow her to pay off both her remaining mortgage (there is no penalty charge for doing so) and her credit card debt. Tanya also wishes to draw down a further £20,000 and fully understands that because of her income level of £20,000 per annum this would be taxed at her marginal rate of 20%. This net £16,000, together with the £4,500 remaining from the tax-free lump sum, would be split between her daughters to help them each get a mortgage.
Tanya could then leave £53,500 invested in her pension fund. If Tanya dies early, this fund should pass to her daughters. Tanya’s adviser carries out the necessary transfer value analysis and explains what she would be giving up by transferring her DB pension. The adviser has concerns about Tanya relying on a future inheritance, and for some comfort asks to see her parents’ will. Tanya also points out that she is planning to downsize in about five years, which should release around £150,000 - £200,000.
The adviser completes his analysis and writes his report for Tanya to consider. He carefully reiterates what they have discussed. Tanya fully takes on board his comments but decides to transfer and then, after 5 April 2015, crystallise her fund and take a payment of the tax-free cash together with a further taxable £20,000.
Nigel Orange is Technical Support Manager (Pensions) at Canada Life
March 2015 Investment Life & Pensions Moneyfacts ® 11
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