The amount of cash accumulated in a pension that can be transferred
from a previous employment to a new pension is called a transfer
value. In the case of an occupational defined
benefit scheme the value is calculated by an actuary or reflected in the value of the pension fund in the case of
a defined contribution scheme such as a personal pension and
stakeholder pensions or money
purchase scheme. It will normally be transferred to a new
scheme by section 32 policies or a personal
pension transfer plan.
value analysis system
Introduced from 1 July 1994 and a method specified by LAUTRO
on the 1 January 1995, now the Financial Services Authority
the transfer value analysis system (TVAS) is the method applied
to all pension
transfers from a final salary occupational scheme. The TVAS
will calculate the critical yield required from a receiving
personal pension or section 32 policies to match at retirement
age the benefits provided by a final salary occupational
Since A-Day and Pension Simplification rules from 6 April
2006, changes to trivial pensions aim to increase the number
of options available where an individual has a smaller fund
by taking this as a tax free lump sum. There are a number
of conditions that the individual must comply with as follows:
The member must take the trivial pensions
within a 12 month period;
The total amount taken as a cash sum
cannot be more than 1% of the standard lifetime allowance.
For 2006/07 this is £1.5 million so the trivial
pension limit would be £15,000 in 2006/2007 tax
year and includes the capital value of pensions already
Pensions already in payment are valued
at £25 capital for every £1 per annum gross
The fund to be used for the trivial
pension must be commuted in it's entirety;
Commutation must occur between the
member's age of 60 and 75;
Pensions in payment may also be commuted
but will be taxed in full as earned income.
There is a penalty of up to £3,000 for individuals who
negligently or fraudulently obtain an unauthorised payment.
This includes trivial commutation payments when the value of
benefits from all schemes exceeds the 1% limit.
Updating the statutory powers and duties of trustees contained
on the Trustee Act 1925 and the Trustee Investments Act 1961,
the Trustee Act 2000 came onto force on 1 February 2000 establishing
a new statutory duty of care for trustees when carrying out
their duties under trust deed of the Trustee Act.
The Trustee Act 2000 only applies to England and Wales and
gives trustees, including pension scheme
trustees, wide investment powers for which they must:
to the suitability of the investment for the trust and
the need for diversification;
and review the investments varying the spread where appropriate;
To obtain expert
advice on how to diversify or vary the investments of
the trusts unless the trustees believe that such expert
advice is not necessary.
The trustees have a duty to act in the best interest of the
beneficiaries and must be diligent to avoid any loss otherwise
they may be liable for any breach of their duty. Similarly,
the trustees must be active at monitoring the trust investments
regularly especially where a professional trustees charge for
their services as in the case of Nestle v NatWest Bank.
Under section 29 of the Trustee Act 2000, professional trustees
can charge for services performed since 1 February 2001 without
the need for an expressed professional charging clause in the
trust deed. However, these trustees must at all times avoid
any conflict between their duty of care to beneficiaries and
their personal interests.
For a defined benefit final
salary pension the retirement benefits of the scheme member
will depend on the assets of the scheme to pay the pension income
at retirement age. In some circumstances the scheme can be underfunded
which means its assets are less than the accrued liabilities
of benefit payments. Therefore by winding
up a scheme, the employer would have insufficient funds
to meet the benefits promised to scheme
Under the minimum funding requirement (MFR)
the scheme trustees and employer must agree a schedule to correct
the deficit over a 5 year period. The underfunded position can
be corrected with extra contributions from the employer. The
deficit can occur for a number of reasons such as poor investment
return, a reducing annuity rate or a greater increase in salaries than expected.
unapproved retirement benefit scheme
For larger employers, Unfunded unapproved retirement benefit
scheme (UURBs) can provide specific benefits to the employees
at retirement. Neither the employer or employee fund the pension
scheme but a promise to the employee is made for the benefits
payable only at retirement.
As there are no contributions made to UURBs, there are no income tax or National Insurance
(NI) liabilities. When the benefits are paid at retirement the
income and lump sum commuted is fully taxable to the member
and tax allowable for the employer.
For an individual at retirement there are options other than
a conventional pension
annuity that pays a fixed although guaranteed income until
the death of the annuitant.
Operating in a similar way to a with
profits annuity, a unit linked annuitant makes an assumption
about the growth rate of the unit price of the underlying assets.
The higher the assumed growth rate the higher will be the initial
income. However, if the actual growth rate is less than the
assumed growth rate the future income will fall.
If the underlying assets are equities, the income payments made
are likely to be more volatile compared to a with profits annuity.
Although in the long term equities have produced the greatest
returns, there is no guarantee that this can continue in the
An individual should first consider guaranteed annuity and compare this to a unit linked annuity. The guaranteed annuity has the option to use an open market option to search for the highest pension annuities, adding all the features necessary such as spouse's income, escalation and frequency of payment. Once you have purchased an annuity it cannot be changed, so learn more about annuities, compare annuity rates and before making a decision at retirement, secure a personalised annuity quote offering guaranteed rates.
A unit trust is an open-ended collective investment where the
assets of the unit trust are held for the investors by trustees.
Unit trusts are open-ended because the number of units in the
trust will depend on the daily supply and demand. Unit trusts
are collective investments as they allow many investors to 'pool'
their money to make a larger fund that is then invested by professional
Most unit investment management companies will offer their unit
trusts with individual
savings accounts (ISA) "wrapper". An investor
should always use their annual allowance for ISAs first due
to the tax advantages and in particular the fact that ISAs are
free of CGT on disposal. Similarly, investors of personal
equity plans (PEP) will find that the underlying assets
are also related to a unit trust fund.
The underlying assets of a unit trust could be fixed interest
securities or ordinary shares invested throughout the world.
In the UK there are over 1,500 unit trust funds with over 150
investment management companies. Many unit trust funds are general
investments with a range of interest bearing securities as well
as equities and should be considered as long term investments.
However, there are specialist unit trust funds investing only
in say, corporate bonds or a specific sector such as the US,
or a particular theme such as bio-technology, and all these
funds have different risk and reward profiles. Before making
any decisions, investors should seek advice from an independent
financial adviser (IFA) to determine which fund is most