With the Workplace Pensions now up and running a number of Government departments are already looking at this as a work in progress. All UK businesses need to be aware of the need for on-going governance and due diligence, as the responsibilities ultimately lie with them.
PLATFORMS – FROM PLATFORUM
Synopsis: This Bulletin considers the various proposals set out in the Pensions Schemes Bill 2014/15.
Date posted: Monday, December 08, 2014
This Bulletin will briefly consider the various changes relating to pension transfers that are being introduced, primarily but not exclusively, via the Pensions Schemes Bill 2014/15.
The Bill introduced the concept of ‘safeguarded benefits’ which is defined as benefits other than:
(a) Money purchase benefits, and
(b) Cash balance benefits.
It is these ‘safeguarded benefits’ to which restricts and requirements apply.
A Member’s Right to a Transfer Value
The Bill also extends the current transfer rights for scheme members with ‘flexible benefits’, i.e. money purchase schemes, giving them a right to transfer up to and beyond their scheme’s normal retirement age, and amends existing statutory transfer rights so that they apply in relation to benefit categories, rather than at scheme level.
This is designed to provide members with a statutory right to a transfer value out of a money purchase scheme to allow them to move to a scheme that will offer the flexibility they require if their existing scheme does not.
Restriction on transfers out of unfunded public service defined benefit schemes
The Bill amends section 95 of the Pension Schemes Act 1993 such that the right to a transfer value only applies to a scheme ‘that is not an unfunded public service defined benefits scheme’. It goes on to say that transfer to another DB scheme can take place if:
• the benefits that may be provided under the other scheme by virtue of the transfer credits are not flexible benefits,
the trustees or managers of the other scheme are able and willing to accept payment in respect of the member’s transferrable rights, and
• the other scheme satisfies requirements prescribed in regulations made by the Secretary of State or the Treasury.
As yet it is not clear what the content of the proposed regulations will be.
It is possible for benefits to be transferred to a money purchase arrangement, but it seems this is only possible where:
• the benefits that may be provided under the personal pension scheme by virtue of the acquired rights are not flexible benefits, we assume this means securing a lifetime annuity based upon the current definition.
However, it is also possible for the individual to transfer out to secure benefits by means of an annuity from an insurance company based within the UK or other EEA.
So, where does that leave individuals in unfunded public service pension schemes? On the face of it, they will only be able to take their benefits from within that scheme, they can only transfer out to another DB pension scheme which is prepared to accept the liability. So, pending more detail in regulations, it might mean the following options are open to individuals:
• Where individuals change employment and move to a new employer, offering a funded DB scheme that is still willing to accept a liability on leaving that scheme, it would be possible to transfer to a money purchase arrangement. However, one wonders how readily transfers of final salary benefits will be accepted by schemes only offering pension accrual on a career averaged revalued earnings (CARE) basis.
What about the idea of a GP surgery that operates as a limited company? Might it be possible for one or more of the doctors to set up a DB SSAS and would it be possible for that scheme to accept a transfer? That will not be known until the regulations are published and even if it is technically possible will it be allowed?
• It may well be possible to consider a transfer into a variable lifetime annuity. Whether the advantages of this type of annuity contract would be sufficiently attractive for an individual to transfer into from a public service pension scheme must be doubtful. However, if the individual was in poor health it may well be attractive, especially given the fact (based upon the Autumn Statement) any dependant’s annuity or guaranteed payments would be free of income tax.
It is important to issue a word of caution over the dangers of allowing an individual to rush into a transfer of retained benefits out of a public service pension scheme prior to the ban coming into force.
Transfers out of funded public service defined benefit schemes
A power is being introduced, by an additional clause, section 97A, to be inserted in the Pensions Schemes Act 1993, for Ministers to require the cash equivalent transfer value for transfers from funded public service schemes to schemes from which flexible benefits can be obtained to be reduced, in circumstances where the relevant Minister reasonably expects that such transfers, either singly or in combination with other factors, will significantly increase the risk or level of payments out of public funds to support the pension scheme to meet its liabilities.
Requirement for Advice
Any individual who has either a member’s or a dependant’s entitlement to safeguarded rights and is looking to either:
• transfer these to a scheme/arrangement where they can be taken flexibly, or
• convert the scheme such that the benefits can then be taken flexibly
The trustees/managers of the scheme with the safeguarded rights will ensure that member or survivor has received appropriate independent advice. Currently the Bill states that the Secretary of State will make regulations setting out how the scheme trustees/managers satisfy these checks.
Where the trustees/managers fail to carry out a check required, civil penalties under section 10 of the Pensions Act 1995 may apply to the trustee/manager who failed to take reasonable steps to ensure that the check was carried out. However, failure to carry out the check does not affect the validity of any transaction.
It is not yet clear what is meant by the term ‘appropriate independent advice’. Regulations are to be made defining what this means. One assumes it does not literally mean restricted advisers are not able to provide this advice, but we will have to wait and see.
As things stand, whilst it is clear the direction in which this legislation is going, it is not really possible to provide much details as to how it will impact of advice financial planners give their clients. We will need to await the publication of regulations to get this level of detail.
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