I have a pension fund which, after several changes of ownership, is now with a closed-book life insurer. The policy offers an attractive guaranteed annuity rate but otherwise is very poor.

There is no drawdown option, the policy is not written in trust so there is no opportunity to shelter funds free of IHT, and the death benefit should I die before taking an annuity is only £27,000 versus the current fund value of £145,000.

I can transfer the funds to a SIPP provider though it seems that I am forced to first obtain the approval of an independent financial adviser. This is despite the fact that I am a top-rate taxpayer, an experienced investor and have more than adequate funds for my retirement even without this particular pension pot. Any suggestions? Nick

Tom Selby, AJ Bell Senior Analyst says:

Pension reforms introduced in April 2015 gave savers with defined contribution (DC) retirement pots such as SIPPs greater flexibility over how they take a retirement income.

While previously only those with a secure guaranteed income of £20,000 or more could take as much or as little out of their pension as they liked when they reached age 55, the changes opened up this flexibility to all retirement savers.

However, the Government also deemed it appropriate to place certain restrictions on transfers from pension schemes which provide a guaranteed retirement income.

Public sector workers who are members of unfunded defined benefit (DB) schemes were barred from transferring out altogether, presumably because the Government was worried about being bombarded with demands for transfer values.

Members of Local Government pension schemes (which are funded) and private sector DB schemes are allowed to transfer, but if their fund is valued at £30,000 or more, they must first obtain regulated financial advice. This is deemed necessary because the guaranteed pensions they are giving up are valuable and the decision to transfer involves complex choices.

It is not just DB schemes that are subject to this advice requirement – any pension deemed to include ‘safeguarded benefits’ worth £30,000 or more is also caught.

The most common are policies with a guaranteed annuity rate attached. This simply means that the product promises to pay a certain level of income from a pre-determined date set out in the policy documents.

Retirement plans that include Guaranteed Minimum Pension (GMP) rights are also caught by the advice requirement, as are those with ‘Section 9(2B)’ rights.

Both of these relate to people who contracted-out of the state pension, with GMP plans linked to employment between 6 April 1978 and 5 April 1997, and Section 9(2B) policies to 6 April 1997 onwards (contracted out under the ‘Reference Scheme Test’).

There is no sidestepping this advice requirement, so if you do decide to transfer it’s worth spending time going over the decision with your adviser.

The rules only require you to take advice, meaning you do not necessarily need a positive recommendation in order to transfer.

DO YOU HAVE A QUESTION ON RETIREMENT ISSUES?

Send an email to editorial@sharesmagazine.co.uk with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares.

Please note, we only provide information and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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