Journal :: PCLS - a Complaint Waiting to Happen

Published: February 25, 2010
Author: Graham Dragon
Category: Tax
Permalink: PCLS - a Complaint Waiting to Happen

I have just prepared a pension transfer case for a husband and wife who are both members of an executive pension. Under pre A-Day rules, the husband would now be entitled to just over 17.5% pension commencement lump sum. The wife’s entitlement would be just under 20%. As we all know, under post A-Day rules they would both be entitled to 25%. Taking full account of all factors, including ongoing charges, availability of suitable funds, critical yields etc, their existing pension contract was simply not appropriate for the needs of either client. A transfer to a more appropriate scheme was clearly best advice for them both. The scheme which seemed to be most appropriate did not offer a Section 32 contract.

If these were your clients, what advice would you give?

Would you:

1. Advise a straightforward transfer without informing the receiving scheme it is a block transfer?
2. Advise a block, or “buddy???, transfer?
3. Tell the clients that as they are in an occupational scheme they should simply stay where they are as you do not want to take the risk of advising on such a transfer?
4. Refer the case to another IFA who specialises in occupational scheme transfers and let that IFA take on both the risk and the work involved?

Hopefully nobody has answered “3???! Although, in my experience many financial advisers freeze in the headlights whenever the word “transfer??? is uttered. There can be interminable arguments between equally qualified and experienced advisers about just what is best advice. But if it really is in the client’s best interests to transfer, remember you are just as guilty of negligence by telling the clients not to transfer as you would be if you advised them to transfer when this was not appropriate.

If you answered “4???, we may be able to help you to retain that business in your practice without high risk or a lot of work. This could give you significant increased profits and add substantial value to your practice. Please e-mail us, or telephone us on 023 8089 2222 to find out more.

If you answered “1???, I presume your logic is that there is no point trying to protect pre A-Day tax free cash when the amount you are protecting is less than the 25% to which the client is entitled under post A-Day rules. If there is nothing to protect, why bother trying to protect it?

I recently spoke to a major provider in the pensions transfer market about this very issue. They told me it is rare for advisers to register a block transfer with them when the protected lump sum is less than 25%. They even seemed bemused that I would do so, although their pensions technical specialist later agreed with me that it was absolutely the right thing to do. This suggests many advisers are simply not bothering to protect low percentages of cash.

But why?

In the example I gave I can see no disadvantage to either client in opting for a block transfer.

Is there any possible disadvantage to the client if they do not protect the pre A-Day benefits? Most certainly.

If the protected lump sum is 17.5% of the fund now, what happens if over the next few months the fund drops by, say, 50% - which could easily happen if the economy suffers the “double dip??? predicted by some commentators? Well firstly, if it is still protected, the amount of protection will go up in April due to the increase in the lifetime allowance. Secondly, as it is the cash sum rather than the percentage which is protected, in the example I have given the client will now be able to take 36% of the new value rather than the 25% allowed under the new rules. With a £100,000 fund you will have lost that client £11,000 of their pension commencement lump sum simply by not bothering to protect their pre A-Day entitlement. This is a complaint just waiting to happen – and a complaint that will almost certainly be upheld.

The moral of the story is you should always take notice of pre A-Day benefits, even if they do not appear to be relevant at the moment. And make sure your clients can make an informed decision, and are fully aware of all possible downsides of any recommendations you give, even if they are only potentially disadvantageous and not currently an issue.

Finally, there are some other aspects of protected PCLS which many advisers have missed and which could be presented to clients now as a major opportunity. An opportunity which could well be scuppered after the election. For more information on this and a number of other opportunities, please attend my “Pre-Election Opportunities??? training day on 30th March. Reply to this e-mail, ring us on 023 8089 2222 or visit our website for more information on this exciting and informative day.

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About Graham Dragon

Note: We do not accept liability for the content of our e-mail Journal or for the consequences of any actions taken or not taken by yourself or any third party on the basis of the information provided. We are unable to advise you on tax matters. If you wish to obtain further information or help on this or on any other tax matters you should consult with a tax accountant or other suitably qualified and experienced tax professional.

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