Additional Voluntary Contributions

Transcription

1 Additional Voluntary Contributions Options for those currently contributing to the Prudential AVC facility Independent Financial Guidance Prepared by Hewitt - Consulting Actuaries to the Teachers Panel of the Teachers Superannuation Working Party

2 Background The options for members wishing to improve their pension through the payment of additional voluntary contributions in the Teachers Pension Scheme (TPS) have changed. The ability to buy added years reckonable service has been replaced, other than for those already participating, by the facility to buy additional pension in multiples of 250 of annual pension up to a maximum of 5,000 per year. The other option provided by the TPS is the payment of contributions to the Teachers AVC facility provided by Prudential. As pensions legislation evolves, so too does the number and variety of alternative savings options available to members of the TPS. The latest change in legislation to affect the options for members was the Finance Act 2004, which came into effect from A Day on 6 April This created a single tax regime for pensions, whether they are occupational schemes such as the TPS, or personal pensions, including Stakeholder pensions. The Teachers Panel has become aware that, as a result of these changes, there are a number of financial advisers suggesting that members of the TPS could benefit on transferring their Prudential AVC fund into a selfinvested personal pension (SIPP). The purpose of this guide is to set out the issues that members should be aware of when considering this particular course of action. 2

3 Prudential AVC Facility For the purposes of this guide, we are only considering the options and key considerations in relation to the Prudential facility. Fund options available The fund options are set out in more detail in the literature provided by Prudential. The funds offered are all managed by Prudential and cover a range of investment styles, asset types and objectives. These are categorised by Prudential into 5 risk ratings, from minimal risk to higher risk. The funds themselves, under current legislation (2007/08) are free of most taxes. The With-Profits fund is the fund into which contributions are paid if no specific fund or funds are chosen. This fund seeks to distribute bonuses which reflect the returns achieved on the underlying investments, whilst smoothing the peaks and troughs of investment performance. Due to the smoothing basis, there is no direct link between the bonuses declared in any one year and the investment returns achieved by the underlying investments in the With-Profits fund. Underlying investments are UK and overseas shares, property, fixed interest assets, and cash, in proportions that Prudential believes achieves the right balance between investment risk and potential returns. The return achieved for individual members is determined by the level of bonuses declared from year to year by Prudential, together with any terminal bonus payable on encashment of the funds. It is possible to switch all or part of the fund to another Prudential fund within the AVC facility, or to transfer to another pension arrangement. In all cases, there is a possibility that the bonuses declared exceed the value of the plan. This may result in an adjustment known as a market value reduction being deducted from the fund value. This is feature of all With-Profits funds, but it is not an automatic outcome. 3

4 Things to consider when transfer out of Prudential is proposed What level of investment choice are you looking for? The Prudential AVC facility provides a range of unit-linked funds which allow investment directly into a wide range of assets including shares, commercial property, cash and government and corporate bonds, as well as a with-profits option. SIPPs allow investment directly into a typically much wider range of asset types managed by a greater choice of managers. It is unlikely that, in anything but the minority of cases, the wider scope of investment afforded by the SIPP would be required. The majority of investment profiles can be accommodated by the Prudential facility. How much do I pay in charges? Charges will vary widely between different providers and different types of pension arrangement. Charges for the Prudential AVC are set out in its key features document for the unit-linked options this is, for most funds, 0.75% of the value of the funds per year, and for the withprofits fund this is currently projected to be 1% per year (based on assumed rate return in the with-profits fund of 7% per year). There are no other charges and no commission is paid to advisers by Prudential. There are, in most instances, charges in addition to the fundbased charge relating to the use of a SIPP, and these charges may be levied at inception, and/or on an ongoing basis. There may also be separate fees or charges that relate to the payment of commission or other remuneration to an adviser. 4

5 These charges are in addition to any charges for investment in underlying funds, trading charges on shares etc. These additional charges are often expressed as monetary amounts rather than percentages, which means that, to make a SIPP cost effective there may require to be a significant sum ( in the region of 100,000) to invest to ensure that these charges are not disproportionately high. Where should I go for advice? There are a number of different types of adviser and it is important to establish what type you are speaking to. There are independent financial advisers, who are able to advise on products from a wide range of providers. Others will be restricted to only promoting the products of one, or a limited number of providers. We would recommend that, in most cases, it is most appropriate to seek advice from an independent financial adviser (IFA). If you do not have an existing relationship with an IFA, an organisation called IFA Promotion can provide you with details of IFAs in your area. They can be contacted on , or online at You should be aware that IFAs charge for their advice in one of two ways. They could charge you an upfront fee, or instead, commissions may be payable from your investment which could affect the value of your fund. If I am considering changing existing contributions and/or transferring existing funds, what do I need to know? It is imperative that you understand the implications of stopping contributions that you are already making, and/or the impact of transferring your accumulated fund to another arrangement. 5

6 The Teachers AVC provides members with flexibility to stop, restart, decrease or increase their levels of contribution, without incurring any charges. There are however some important considerations regarding transfer of funds from Prudential, specifically in relation to the With-Profits Fund. As already mentioned, if you transfer your accumulated fund value from the With-Profits Fund before normal retirement age there may be a Market Value Reduction applied in some circumstances. It is often difficult to readily see the returns you are achieving in a With-Profits fund, as they are a combination of bonuses declared year-on-year, and a potential final terminal bonus payment. In order to make an informed decision, you should request an up-todate fund value for your Teachers AVC from Prudential and ask your adviser to justify any advice to redirect contributions, or to transfer existing funds. Another issue that you should consider is that Prudential are, at present, considering the possibility of distributing funds to policyholders within the With-Profits Sub-Fund in respect of the inherited estate, which is described by Prudential as an amount of money in excess of the amount we expect to pay out to existing policyholders. This means that if your AVC fund is held in the With-Profits Sub- Fund you may be entitled to any share of that estate that Prudential determine can be reattributed to policyholders. This may be in the form of an enhancement to the AVC policy value or a cash payment. Your entitlement to this enhancement may be lost if you claim or transfer your With-Profits holding or it may be reduced if you stop or decrease your contributions. Your adviser should take this into account in any advice relating to your existing Prudential arrangement. Transferring to another scheme has further implications which you should take into consideration before making a decision to move away from Prudential AVC. These are commented on (right). 6

7 Firstly, if you are a higher-rate tax-payer, then you should be aware that currently your contributions are taken directly from the company and therefore get higher-rate tax relief at source. However, if you were to transfer to a non-company sponsored scheme, then going forward, you will need to claim the difference between basic tax relief and higher-rate tax relief through your self-assessment form. Secondly, being part of the Teachers pension scheme provides you with life cover. It is also possible to increase this benefit through the Prudential AVC Facility as it allows you to purchase additional life cover, and contributions to this will benefit from tax relief. The scheme you transfer to may not have such a feature available. Furthermore, you should note that any annuity purchased from Prudential with your Teachers AVC fund is underwritten by the Government. If you were to transfer your funds, and purchase an annuity elsewhere, this protection may no longer apply. If you require any information from Prudential about your arrangements with them you can contact them on or visit the website at In summary When considering a change to the direction of contributions, or the transfer of funds from one arrangement to another, it is important to understand the long-term performance of the funds you are moving from the level of risk inherent in those funds the penalties or charges levied on the existing arrangement for stopping contributions or transferring funds away the charges levied on contributions to the new arrangements or on the sums transferred in the value of any other entitlement lost or gained as a result of the change whether, for the sums involved, possible penalties and additional charges outweigh any potential benefit 7

8 Organisations represented on the Teachers Panel Association for College Management Association of School and College Leaders Association of Teachers and Lecturers Educational Institute of Scotland Irish National Teachers Organisation National Association of Headteachers National Association of Schoolmasters Union of Women Teachers National Association of Schoolmasters Union of Women Teachers (Scotland) National Society for Education in Art and Design National Union of Teachers Principals Professional Council Professional Association of Teachers Scottish Secondary Teachers Association Ulster Teachers Union Undeb Cenedlaethol Athrawon Cymru University and College Union Origination by Paragraphics Printed by Victoria House Printing Co /08/07