Home > News > 2000 > November 2000 > Transfers to Personal Pensions - New GN11 regulations from 6 April 2001
Transfers to Personal Pensions - New GN11 regulations from 6 April 2001
Caroline Harrington updates her October 2000 website article on the impending Inland Revenue change to transfer limits.
Last month you may have read my comments on the draft regulations issued by the UK Inland Revenue's Pensions Scheme Office (PSO) concerning transfers from occupational schemes to personal pension plans. We have now had a second draft of these regulations, and the pensions industry has until 17 November to make final comments to the PSO. The PSO then intend to issue the final regulations before the end of this year, to take effect from 6 April 2001.
Who do these regulations affect?
If you are in an occupational scheme, such as a company pension arrangement for employees, and wish to transfer to a Personal Pension Plan (PPP) then these regulations could affect you. If you are a "controlling director" of your company, or have earned over half the salary cap in the six years prior to your decision to transfer, then the administrator of your scheme will need to certify that your transfer value does not exceed a certain level. This check is often known as a GN11 check.
Why does the PSO want to restrict transfers?
Occupational schemes are seen as having generous contributions limits, but restrictive benefit levels. Personal Pension Plans have tighter limits on how much can be contributed, but the limits on benefits are less restrictive. Someone in a money purchase occupational scheme (or someone paying AVCs) might find that the benefit limits in their occupational scheme might bite. In a PPP there are no limits on the pension which could be paid. It is never the intention in occupational schemes to build up a fund which is too big, but this can occur, if for example the fund achieves particularly good investment returns. The PSO do not want people to take advantage of the generous tax reliefs offered to company pension schemes to build up large schemes, and then transfer them to an arrangement where the pension is not restricted. (Although given that pensions are taxable anyway it is hard to see their problem!)
Am I likely to want to transfer?
If you are a high earner, thinking of retiring in the next year or so, and perhaps have large AVCs, then you should ask the administrator of your pension scheme to check that you will not be overfunded at the time of your retirement. The decision to transfer to a PPP is an important one, and you must get independent advice to point out all the pros and cons. Not many people will chose to transfer from a final salary type scheme, where their pension is guaranteed, to a PPP where the pension is not guaranteed and depends on how well the funds perform.
If you would like to start receiving retirement benefits, but are not ready to leave work, even if you only intend to keep a directorship, then a transfer to a PPP might suit you - you are not permitted to retire while you are still employed if your benefits are in an occupational scheme.
So is the GN11 check reasonable?
No. The basis
Inland Revenue are suggesting for calculating these maximum transfer values is particularly mean! As already mentioned in my
article, our main complaint is that the new calculations bear no resemblance to current market rates for annuities. As per
Adrian's
article on annuity rates, buying a pension is very expensive, and likely to get more so in future. The proposed basis bears no relation to the current cost of annuities.
Is the second draft of GN11 better?
Hardly. There is still nothing to relate transfer values to market rates for annuities. Someone at pension age could not secure the paid-up pension they have just left behind with the funds allowed in the GN11 check.
There is some good news. The second draft now includes an MFR underpin. This means that a transfer value need not be less than the minimum transfer value calculated on the MFR basis. This is helpful to people in final salary schemes. There are also slight improvements to the details of the calculations, in things such as the mortality rates we must assume, but these slight changes do not go far enough.
Under these new regulations some people will no longer be able to retire to a PPP to take retirement.
Caroline Harrington, November 2000.