Protect your pension
Pam Atherton looks at how the new pension rules could affect you.
Anyone wishing to protect their pension fund from the effects of sweeping new rules expected next year should act sooner, rather than later.
Assuming that Gordon Brown gives the go-ahead to the Inland Revenue’s simplification regime, individuals expecting large amounts of tax free cash under their current pension arrangements should take action to protect these benefits prior to April 2005, to be known as A Day.
Enhanced protection
This can be done via "enhanced protection" - a means of ring fencing your pension fund prior to A Day to preserve tax free cash sums in excess of 25% of fund value, and to avoid the "recovery" charge of 55% on all funds over the proposed £1.4m lifetime limit. Whether you are in a defined benefit or defined contribution scheme, if you think you might want to transfer out of your scheme before vesting benefits, you should do so prior to A Day. This is because post A Day transfer will wipe out valuable enhanced protection.
Anyone who joined an occupational scheme after 1987 is not allowed to take more than £150,000 in tax free cash. But anyone who joined a company scheme prior to 1987 can take unlimited tax free cash as it is based on uncapped earnings - sometimes running into millions of pounds. This facility can only be protected if you remain within the same scheme until you take benefits, or if you transfer your fund into a Section 32 buyout bond before A Day.
Section 32
Section 32 contracts are deferred annuity policies which are bought by occupational scheme trustees from an insurance company of your choice, or a Self Administered Section 32. Unlike a personal pension, a Section 32 will match the benefits offered by a former occupational scheme, including tax free cash, guaranteed minimum pensions and lump sum death benefits.
The advantage of taking tax free cash is self-evident - all pension income, whether paid as an annuity or directly from the assets of an occupational scheme, will be taxed at your marginal rate - which could be 40%. Reasons to transfer out of an occupational scheme could be a desire to sever links with a former employer, to have more control over the investment strategy or to reduce charges.
You should always take professional independent financial advice before transferring because your occupational scheme may offer valuable benefits, such as ill health or early retirement benefits, which you could not replicate elsewhere.
Final salary schemes
Final salary schemes offer members guaranteed levels of benefit linked to salary and years of service, whereas Section 32s and personal pensions require you to shoulder the investment and annuity risk.
You also need to check that the management charges on the Section 32 contract of your choice do not make transferring uneconomic. Furthermore, transfers from a with profits fund may result in early surrender penalties and/or market value adjusters being applied which could severely reduce the transfer value.
Pam Atherton is a freelance journalist