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Transfer analysis

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08/03/2010

Your guide to understanding the pension transfer analysis report

When considering the possible transfer of the cash equivalent of a client’s defined pension benefit it is a regulatory requirement to prepare a detailed transfer analysis report (except where a client is crystallising benefits within 12 months of the transfer). To help you in this process we have provided a sample of the report output below to which we have added explanatory notes.

Following FSA Policy Statement PS12/8, there are some additional features and text now included in transfer analysis reports which have not yet been incorporated in the attached guide. If you have any questions about this additional content or in general about the transfer analysis report, please contact the Pensions Technical helpdesk on 023 8072 6010.

Background

This report can be produced on a Skandia single price personal pension and using the Collective Retirement Account. As Skandia MultiFUNDS Assurance Limited does not offer a Section 32 policy, no comparison figures with a Section 32 are provided on a Collective Retirement Account report, although a transfer could be made to a Section 32 contract such as the Skandia Buy-Out Bond.

This guide only covers the Client Report, the Pension Protection Fund and the Technical Issues parts of the report.

Please note that for further support, Skandia provides a dedicated transfer analysis service for financial advisers comparing existing benefits with that available through the Skandia Personal Pension Scheme, the Skandia Investment Solutions Collective Retirement Account and the Skandia Buy-Out Bond.

Pension Transfer Analysis

Prepared for Mr C Yield
Example Pension Scheme
on 15 June 2009

This Pension Transfer Analysis Report is designed to assist in deciding whether a transfer of benefits from the Existing Scheme to an alternative pension contract would be appropriate.

We would like to draw your attention to the following important points:

  • Any assumptions made are detailed within this report.
  • A summary of the assumptions that apply to the lower, mid and higher rates of growth are shown at the end of the retirement benefits report.
  • The benefits in the event of death section of the client report are based on the mid rate of return.
  • The critical yields are calculated in strict accordance with FCA guidelines. The member’s protected rights pension can commence from age 55.
  • The critical yields shown in this report are based on the assumptions that apply to the mid rates of growth.
  • The Skandia Buyout Bond is unable to accept any GMP entitlement or Section 9(2)(b) rights. If any of these elements are included within the transfer value, this report will be produced for illustrative purposes only based upon a generic Section 32 but using Skandia’s single price charging structure.
  • A member may have at 5 April 2006 Protected Tax Free Cash rights in excess of 25%. This analysis assumes that the higher of the revalued Protected Tax Free Cash, or 25% of the fund will be payable at retirement.
  • If the member has enhanced or primary protection, rights to the tax free cash may be lower than 25%. This report takes no account of this restriction.
  • Care should be taken if the member has enhanced protection. The amount of the transfer value may be such that ‘Relevant Benefit  Accrual’ occurs and the protection could be lost if the benefits are transferred.

Skandia does not accept any responsibility or liability for the advice provided by financial advisers(1) resulting from the information contained in this Transfer Analysis Report. This report is based on our interpretation of the information provided(2), and whilst we believe this interpretation to be correct, we cannot guarantee it.

Introduction

This report provides:

  • A calculation of the annual rate of growth (Critical Yield) required to provide equivalent retirement benefits to those in the Existing Scheme, assuming the transfer value is invested into a Personal Pension or Section 32 contract.
  • A comparison of the projected benefits at Normal Retirement Age (65) for the Existing Scheme and the potential benefits arising from a Personal Pension and Section 32.
  • A comparison of the projected benefits at Early Retirement Age (60) for the Existing Scheme and the potential benefits arising from a Personal Pension and Section 32.
  • A comparison of the projected benefits available upon death, before and after retirement.

Existing Scheme Benefits

The Existing Scheme offers a pension currently valued at £29,256(3) per annum. These benefits are subject to revaluation in the period to retirement.

Transfer Value

Alternatively the trustees of the Existing Scheme are prepared to offer a transfer value of £350,000, in lieu of benefits under the Existing Scheme, that can be invested into a Personal Pension or Section 32 contract. In addition, a cash incentive of £80,000(4) is available, which can be taken as a cash sum or reinvested to provide additional pension benefits. This report has been produced on the assumption that you would reinvest the incentive amount in an individual plan, and therefore a transfer value of £450,000 has been used. This includes the incentive amount, plus an allowance for Basic Rate Income Tax.

Critical Yields

The benefits in an individual pension plan grow according to the investment return of the funds in which the plan is invested. The Critical Yield shows how much growth is required each year in order to match the value of the benefits that would have been available in the Existing Scheme. For the purposes of valuing the Existing Scheme benefits, an Annuity Interest Rate of 4.1% has been used. This rate is set by the FCA and is reviewed annually.

The following critical yields are based on a transfer value of £450,000. This includes the cash incentive, on the assumption that this will be reinvested in the individual plan, should a transfer take place. This also includes an allowance for the tax rebate that would be payable on the reinvestment, assuming Basic Rate Income Tax applies.(5)

Critical yields

Alternative Critical Yields

Should you decide not to reinvest the cash amount as detailed above, the critical yields based on the original unenhanced transfer value of £350,000 would be as follows.

Alternative critical yields

Normal Retirement Benefits at the Mid Rate of Return

Annual Pension Benefits

The graph below compares the projected pension benefits for the Existing Scheme with those that could become available at age 65  from the alternative arrangements. The initial pensions are; Existing Scheme £40,482, Section 32 £34,901 and Personal Pension £32,586 (10,11,12).

Tax-Free Cash and Reduced Annual Pension

The estimated maximum amounts of tax-free cash and annual pension payable at age 65 are as follows.

See notes (13,14,15,16,17,18,19)

Normal retirement benefits at the mid rate of return (click image to enlarge)
Normal retirement benefits at the mid rate of return (Click image to enlarge)

Early Retirement(20) Benefits at the Mid Rate of Return

Annual Pension Benefits

The graph compares the projected pension benefits for the Existing Scheme with those that could become available at age 60 from the alternative arrangements. The initial pensions are; Existing Scheme £26,088, Section 32 £24,613 and Personal Pension £22,318. (11,12,21,22,23)

Tax-Free Cash and Reduced Annual Pension

The estimated maximum amounts of tax-free cash and annual pension payable at age 60 are as follows.

See notes (13,14,15,16,17,18)

Early retirement benefits at the mid rate of return (Click image to enlarge)
Early retirement benefits at the mid rate of return (Click image to enlarge)

Benefits in the Event of Death (24)

Death Before Retirement

The benefits payable on death before retirement can be a combination of cash lump sums and an income payable for the life of a spouse or dependant.

Benefits in the event of death

Capitalised Value of Death Benefits Before Retirement

To simplify the comparison of benefits payable on death before retirement, the graph below shows the total cost of providing all projected death benefits for the Existing Scheme and the projected fund values that could be achieved by a Personal Pension and Section 32 contract. Values are shown for each age through to age 65.

Capitalised value of death benefits before retirement (Click image to enlarge)

Death After Retirement

The Existing Scheme member’s pension will continue to be paid for a minimum of five years from the date of retirement. A Spouse’s pension equal to 50% of the member’s pension will be paid in the event of death of the member after retirement.

Assumptions

This report uses assumptions for future rates of investment return as prescribed by the Industry’s Regulators and are subject to regular review.

The Critical Yields have been calculated using an Annuity Interest Rate of 4.1%. The Annuity Interest Rate is the annual rate of investment return used in calculating the Annuity Rates for the evaluation of scheme benefits.

The Personal Pension and Section 32 pension amounts assume payments are made monthly in advance. For the Critical Yields, LPI annuities have been valued on the same basis as RPI annuities.

The calculations for the projection of benefits in this report are performed at the Industry’s Standard Mid Rate of Investment Return and are as follows: 33

  • Fund Growth Rate 7%
  • Annuity Interest Rate 4.1%
  • Retail Price Index 2.5%
  • Limited Price Indexation 2.5%
  • National Average Earnings Index 4%
  • Standard Lifetime Allowance (from 2011) 4%

Personal Information

Date of Birth: 1 January 1955 Gender: Male National Insurance No.:
Marital status: Married (34)
Partner date of birth: 1 January 1958 (Assumed)(35)
Same partner as at date of leaving: Yes (Assumed)(36)
Current Employment Status: Employed (Assumed)(37)
Joined Scheme: 1 April 1974
Left Scheme: 31 March 2000 (38)
Final Pensionable Earnings: £46,000(39)

Pension Protection Fund

The government has set up a Pension Protection Fund (PPF) that aims to offer an ‘insurance scheme’ to help provide a minimum level of pension should a pension scheme get into serious financial difficulty after April 2005.

Broadly speaking, those people below the normal retirement age of the scheme when the PPF is appointed will receive 90% of their accrued benefits immediately before the assessment date (subject to a review of the rules of the scheme by the PPF). Benefits relating to post April 1997 service will increase in payment (in line with Retail Price Index capped at 2.5%), whereas no increase in payment will be made in respect of any pension accrued before 1997. This compensation is subject to an overall cap (originally £25,000(40) for those retiring at age 65 before 1st April 2006). The cap will be increased each year, and adjusted to the age at which compensation comes into payment.

The PPF is funded by a series of levies applied to all final salary pension schemes. It should be noted that the management body of the PPF have the right to reduce the level of compensation being paid from the scheme should the PPF itself suffer financial hardship. The government does NOT underwrite the scheme.

Assuming Scheme applies to Pension Protection Fund Today

Assuming scheme applies to pension protection fund today

Technical Issues

Enhanced Transfer Value or Cash Incentive

The trustees of the Existing Scheme are prepared to offer a transfer value of £350,000, in lieu of benefits under the Existing Scheme, that can be invested into a Personal Pension or Section 32 contract. The transfer value used in this report is £450,000. This includes an amount representing the cash incentive of £80,000 offered by the scheme plus Basic Rate Income Tax, and therefore assumes that you would reinvest this amount to provide additional pension benefits, rather than opting for the enhanced transfer value. Please note that the amount reinvested and, therefore, the total Transfer Value, would change depending on the rate of Income Tax you pay.

Transfer Value Expiry Date

The transfer value quoted by the Existing Scheme is out of date and will need to be recalculated if a transfer of benefits proceeds. Therefore, any enhancement or cash offer applicable to this transfer value may no longer be valid.

Ill-Health Retirement Benefits

The majority of final salary occupational pension schemes have the scope to pay enhanced benefits to members who wish to retire early due to ill-health. The level of enhancement, and indeed, whether any such enhancement will be paid is usually at the discretion of the scheme trustees on a case by case basis. This potential benefit will however be lost upon transfer to a Personal Pension or Section 32.

Equalisation Issues

Male and Female retirement ages for the Existing Scheme have been equalised at 65.(42)

The existing scheme benefits include GMP. At present, it is unclear whether these benefits should be equalised along with other scheme benefits. The Pensions Ombudsman has determined that a scheme should equalise GMP benefits, but in the High Court appeal, this determination was overturned on the grounds that it was beyond the ombudsman's jurisdiction. The High Court left open the question as to whether or not GMP benefits should be equalised, and if so, how this might be done.

Scheme Status

The existing Scheme remains open to new members.

Funding Position

The Existing Scheme is known to be fully funded. Therefore, it is unlikely that any increase in benefits in favour of members will take place in the near future.

Transfer Club

It is understood that the Existing Scheme is not a member of a transfer club. Therefore, this is not an issue that needs further consideration.

Discretionary Increases and Transfer Value

It is understood that the transfer value quoted by the Existing Scheme takes no account of the discretionary increases payable under the scheme.

Section 32 GMP Coverage(43)

It appears that the transfer value would be sufficient to cover the GMP liability for this case upon retirement at ages 65 and 60.

Notes to the Report Content

  1. This analysis should form part of a client-specific report and the information contained in it must be verified by the financial adviser.
  2. This normally is obtained from the member’s leavers and/or transfer value statement(s) issued by the scheme administrator. 
  3. This figure takes into account actual historical revaluation from the date of leaving service to the time this report is produced, if applicable. 
  4. This section is based upon a scheme which is offering an enhanced transfer value as an incentive for a member to transfer out. Please be aware that this text will not appear on a report where an enhancement is not relevant.
  5. There are two versions of the critical yields below because of the enhanced transfer value. There will only be one version of this section on a report where an enhancement is not relevant.
  6. This is the annual return required to match the equivalent value of the pension in the main scheme at the normal retirement age, assuming no tax-free cash is taken.
  7. This is the annual return required to match the equivalent value of the pension in the main scheme at the normal retirement age, assuming the maximum tax-free cash is taken by commutation and the pension is subsequently reduced. If the tax-free cash is in addition to the pension at retirement, this field will not be shown.
  8. This is the annual return required to match the equivalent value of the pension in the main scheme at the early retirement age, assuming no tax-free cash is taken.
  9. This is the annual return required to match the equivalent value of the pension in the main scheme at the early retirement age, assuming the maximum tax-free cash is taken by commutation and the pension is subsequently reduced. If the tax-free cash is in addition to the pension, this field will not be shown.
  10. These figures are revalued to normal retirement age.
  11. The existing scheme pension is based on the benefits available at the date of leaving or an up to date pension value if provided. These benefits are revalued to the date of this report using historic data, if applicable. From the current date to retirement, the benefits are revalued in line with the mid rate assumptions stated towards the end of this report. Once in payment the pension from the scheme increases in line with the scheme rules. The personal pension and Section 32 figures are based on the mid rate of return growth assumptions up to retirement. In payment it is assumed that an annuity will be secured reflecting increases in the scheme rules. Increases to GMP and Protected Rights, which may not be in the same proportion as the pension from the scheme, will lead to the rate of increase being different from that which applies to the pension from the scheme.
  12. The Section 32 figures assume the charging structure for the Skandia Buyout Bond – Skandia’s Section 32 contract. However, a wholly notional product is used if there are elements of either GMP or S9(2B) Rights which our Section 32 cannot accept.
  13. Where the tax-free cash figure has been provided by the former employer’s scheme, it will be revalued in accordance with the scheme rules where advised. The system will assume the 3N/80ths basis where the tax-free cash has not been notified. Revaluation will then normally be assumed to be in line with the RPI.
  14. Where post A-Day tax-free cash is available from the main scheme the formula used is; 20 x Pension @ Normal Retirement Age x Commutation Factor/20 + (3 x Commutation Factor).
  15. The tax-free cash shown for the Section 32 is based upon 25% of the projected fund value, providing the GMP can be fully covered first. If not then the tax-free cash will be reduced as the GMP must always be provided. Where there is no GMP then 25% of the fund value is the maximum that can be taken.
  16. The tax-free cash shown for the personal pension is based upon 25% of the projected protected and non-protected rights fund value.
  17. Please note that there may be exceptions to the tax-free cash maximum, if pre A-Day benefits are to be protected by virtue of a block transfer to a personal pension or wind up of a scheme to a Section 32 policy for each member.
  18. These pension benefits may differ due to unisex annuity rates applying to personal pension protected rights. Also differences can be caused by any variance in the commencement date of benefits, for example protected rights payable from age 60 (technically the minimum age permitted is 50, 55 from 2010/11), whereas GMP may not commence until NRD.
  19. For GMP entitlement state pension age is 65 for males and 60 for females. No account is taken of the changes to state pension ages for females as a result of the Pensions Act 1995, or for males and females in the Pensions Act 2007 which takes effect from 6 April 2010.
  20. Where the scheme allows for early retirement the benefits will be shown for either five years prior to NRD or an age specifically requested, if permitted under the scheme rules. Where early retirement is not permitted under the existing scheme, benefits may still be taken early under a PP or Section 32 subject to the GMP liability being met for the latter contract type and meeting the minimum age requirement of 50 (55 from 6 April 2010).
  21. These figures are revalued to the early retirement date.
  22. The retirement benefits available from the former employer’s scheme on early retirement are reduced by the factors advised by the trustees. The penalty will apply to the pension revalued to either NRD or the early retirement date in accordance with the scheme rules.
  23. Where these factors have not been provided the report normally assumes a reduction of 4% pa simple. This assumes benefits are revalued to the early retirement date. The PP and Section 32 benefits are based upon the projected fund growth using the mid rate assumptions, to the early retirement date.
  24. The existing scheme pension is based on the benefits available at the date of leaving or an up to date pension value if provided. This is then revalued to the date of this report using historic data. Then from the current date to the early retirement age, it is revalued in line with the mid rate assumptions stated towards the end of this report. The PP and Section 32 figures also use the mid rate of return growth assumptions.
  25. The CRA is a contract-based scheme.
  26. The Skandia Personal Pension scheme is written under a deed poll trust.
  27. The Skandia Section 32 is not automatically under trust however members can elect to establish a discretionary trust if required. (The Skandia contract is only able to receive non GMP/S9 (2B) Rights monies.)
  28. Lump sum death benefits payable from the former employer’s pension scheme are based on the scheme rules. Often this will be a return of member contributions with or without interest or a multiple of the annual pension.
  29.  This report cannot cater for children or other dependant’s benefits on death. 
  30.  As a statutory minimum where the individual is married or in a civil partnership a spouse’s GMP (for pre-1997 service) has to be provided and a 50% spouse’s pension for post-1997 benefits, where the scheme is contracted-out for these time frames.
  31. Where there is no spouse or civil partner the lump sum benefits for a personal pension will be 100% of the non-protected rights and protected rights fund value.
  32. Where the individual is married or in a civil partnership at the date of death, pension benefits must be payable to the survivor from the protected rights fund.
  33. S9(2B) rights accrued post-1997 in a scheme contracted-out on a reference test basis are treated as protected rights on transfer to a personal pension.
  34. These are the mid rate figures. Projections are also shown at the lower and higher projection rates in the full report. If a comparison is to be made between this report and a report produced by another provider it should be checked that the assumptions used are the same.
  35. The member is always assumed to be married unless advised otherwise. The current marital status should be provided if different.
  36. The spouse’s date of birth affects the critical yield. If unknown a female spouse will be assumed to be three years younger than the member and a male spouse will be assumed to be three years older. If the member is in a civil partnership the partner is assumed to be the same age if we have not been given a date of birth.
  37. Some schemes may apply different death benefits where the member was not married/in a civil partnership with the current spouse/civil partner at the date of leaving the scheme.
  38. This has no direct impact on the critical yield. If not advised otherwise, it will be assumed that the individual is employed. Alternatives include self-employment or unemployment.
  39. The dates of joining the scheme and leaving it will determine the benefits the member is entitled to. These may differ from the actual dates of employment if membership was delayed or the individual opted out of pensionable service before leaving the company. These are also used to calculate the tax-free cash if on a pre A-Day basis or assumed to be.
  40. 'Final Pensionable Earnings’ is the amount of remuneration eligible to accrue pension benefits at the date of leaving in accordance with the definition set out in the scheme rules. These are also used to calculate the tax-free cash if on a pre A-Day basis or assumed to be.
  41. This is the cap for a member aged 65, that was in place when the PPF was established. This is revalued and now stands at £31,936.32 for 2009/10. The compensation cap varies according to the age at which compensation comes into payment.
  42. The benefits will be revalued in line with the scheme rules until the pension scheme is admitted into the PPF. Subsequent revaluation is by LPI until NRA, including the GMP element. The pre-1997 benefits will be level in payment.
  43. In accordance with the Barber Judgement which changed the approach to equalisation on 17 May 1990.
    44. In some circumstances the transfer value may be insufficient to cover the GMP liability as defined by the Section 32 provider. If this is the case they may not accept the transfer value. If this is applicable the report will state it here.

There is normally a three-month guarantee for the transfer value amount. If a transfer request is received within this timeframe the amount to be transferred is not normally altered. A member is only entitled to one cash equivalent transfer value calculation without charge once every 12 months. Any AVCs a member holds will not be included within this analysis and will need to be assessed separately.

This document is based on Skandia’s interpretation of the law and HM Revenue & Customs practice as at March 2010. We believe this interpretation is correct, but cannot guarantee it. Tax relief and the tax treatment of investment funds may change.

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