Tax Free Cash ... need to justify?

DCF_Evaluator

I am close to crystallising an occupational defined contributions scheme. As per most schemes it has always been advertised with the option to take up to 25% of the fund as tax free cash at this point. Nothing I have read to date has indicated to me that this is anything other than an automatic right.

I heard today that I need to justify to a government dept (not sure which one) that I need this cash in order to be able to take it upon crytallising and moving to a drawdown. Worse, I apparently don't have a case at the moment to justify! I am amazed, I didn't think that my option to take the 25% TFC was anyone else's business.

Has anyone else experienced this? ... and if so is it part of the RDR and from 1st January this year or part of more recent legislation?

jamesd

I'm not aware of any requirements for an individual to submit a justification to anyone for taking DC lump sums. It wouldn't be RDR, that's more about charging for advice.

Justifying a tax free lump sum from a defined contribution scheme should be easy:

1. If an annuity was to be purchased, an annuity purchased outside a pension pot gets better income tax treatment than one within a pension pot because it is treated as a partial return of capital.

2. If income drawdown is used the tax free lump sum can be transferred gradually into S&S ISA investments to get the benefit of tax free income. This cannot be done with income generated from within the pension pot.

3. More diversification of investments is possible with the 25% because it's not restricted to the investments that can be held within a pension. That allows such things as residential property investment or using the money for more pension contributions, within the limits on that imposed by HMRC.

4. Can also be used for things like the mortgage clearing payment if the pension pot was set up to back a pension mortgage. Or used to do something else that would otherwise require money to be say taken out of a S&S ISA instead. Things like adapting a home for disability.

For those reasons it's easy to know that taking the lump sum is likely to be the correct choice in most cases. Justifying not taking it would be harder!

I suppose there may be a presumption somewhere that an annuity will be purchased and someone put in a requirement for some scheme to ask members whether they are planning to gamble away all of the lump sum.

If this was a defined benefit scheme there might be some greater reason for a lump sum to be questioned because the commutation rates of income for lump sum are often way below the actuarial break-even value which may be around 28:1 (that's from the coal mines pension in the PPF now. The commutation rate before move to PPF was 9:1, truly horrendously bad for anyone not expecting to die quickly.

Defined contribution pots can be transferred. Unless there's something weird about this one that would be one possible way to resolve any issues.

GhIFA

DCF_Evaluator wrote: »

I am close to crystallising an occupational defined contributions scheme. As per most schemes it has always been advertised with the option to take up to 25% of the fund as tax free cash at this point. Nothing I have read to date has indicated to me that this is anything other than an automatic right.

I heard today that I need to justify to a government dept (not sure which one) that I need this cash in order to be able to take it upon crytallising and moving to a drawdown. Worse, I apparently don't have a case at the moment to justify! I am amazed, I didn't think that my option to take the 25% TFC was anyone else's business.

Has anyone else experienced this? ... and if so is it part of the RDR and from 1st January this year or part of more recent legislation?

Do you have any other occupational pension benefits relating to the same employment?

dunstonh

I heard today that I need to justify to a government dept (not sure which one) that I need this cash in order to be able to take it upon crytallising and moving to a drawdown. Worse, I apparently don't have a case at the moment to justify!

I have never heard of any such thing. Not worded like that anyway. Although there are cases where the lump sum would either not be available or reduced.

Is the scheme an AVC or an employer scheme where there is other pension linked with that employer?
Is the scheme an in house AVC?
Does the scheme contain GMP?

We need more detail on the type of pension it is basically.

DCF_Evaluator

I have three schemes, two from current employment, one from a previous employment. Prior to crystallation schemes B and C will be consolidated into A. It is during this process that the 20% TFC query has arisen.

GhIFA

DCF_Evaluator wrote: »

I have three schemes, two from current employment, one from a previous employment. Prior to crystallation schemes B and C will be consolidated into A. It is during this process that the 20% TFC query has arisen.

Which employment do schemes A, B & C relate to?

Is the other scheme from the current employment a defined benefit scheme? Is the defined contribution scheme an avc?

I suspect it's not a case of you having to "justify" the tax free cash, it's probably more likely to do with checking the maximum TFC you are entitled to under the occupational scheme rules.

DCF_Evaluator

Employment 1 - Scheme C (closed)
Employment 2 - Scheme B (closed) and Scheme A (closed but about to re-open)

All defined contribution. All with major institutions. No AVC's or GMP's involved.

Thanks for the replies. I will find out what is going on/has been going on here and let everyone know asap.

DCF_Evaluator

Ok, this is a bit clearer. I was slightly incorrect, this not (yet) to do with any government dept, it is just internal audit checks at scheme manager(s) especially perhaps those who also see themselves as Wealth Managers. Such IA has always been there but decisions have been taken to ramp it up this year in deference to RDR.

So, vaguely similarly to the way GAD is imposed to stop Mr./Mrs. Pensioner spending all of his/her fund at the same shop and then throwing him/herself on the state sceme providers' IA have started asking propective pensioners to justify how much TFC they need, is it in their best interests etc.

The immediate reaction is that 'its none of your business' but for reasons that don't matter this is not an approach I will be taking and I am sure this in due course will resolve/justify itself.

System

I have just drawn £106,000 PCLS from my SIPP, and wasn't asked to justify it.
If I had been, I'd have said "it's none of your business".

The best answer would be, because I don't trust this government not to change the pension rules (again).

jamesd

The answers I've mentioned should be more than sufficient for them. Harder to justify not taking it than taking it.

Daniel_Elkington

The FCA have said they are 'concerned about' pensions unlocking - i.e. people taking their PCLS rather than it being used to purchase an income.

Basically the regulator feels that there may be a problem and individuals may have been mis-sold into taking a pension early and locking into a very low annuity rate just to get the PCLS and have missed out on £000's of income over the years.

The problem is that this 'concern' has sparked over-vigilance from compliance department's around the country desperate to justify their salaries.

I had a client (67) who had an 80K pension and a 20K mortgage - you can see an obvious solution here. My compliance department suggested equity release instead of taking the PCLS. I got a bit cross with them.

I also had a client (63) who wanted to use a 50K pension to buy a car (12.5K pcls would do that!). Compliance told me she should buy a car on finance with the extra income. I got cross with them.

Just a couple of examples of the madness and headache that a 'concern' from the regulator causes us chaps!

If you know what you're doing and you're sure you want it tell them you are an insistent client and will sign whatever they want in order to get the money.