You do not have to be a financial experts\financial planning experts to know about the current economic situation the world over. The depression and recent Market Turmoil are increasing the numbers of firms descending into administration and eventually liquidation. This will worsen the position both for that company’s workforce but also has a domino affect on other schemes, as examined in some of the other articles or blog posts written on scheme funding. We have already seen the demise of Woolworths and MFI; it is likely that there will be more to come as the depression deepens. The market pundits or elite financial consultants are now predicting a W as against a V; though it does seem the general consensus remains it will get worse before it gets better. The recent snow and the travel chaos which ensued has only served to weaken an already fragile commercial enterprise economy. If the business organisation becomes insolvent it will not be making up the deficit on the pension scheme. The scheme will generally be referred to the Pension Protection Fund (PPF).
The PPF has limited scope and restricted funds with which to support members and protect benefits.
The PPF, which has to work with other bodies , is also likely to suffer delays in being able to pay benefits especially if the numbers of schemes affected increases sharply.
The PPF only provides 90% of benefits capped at £30,856.35 this tax year, at age 65 equating to £27,770.71 gross per annum. Any member on higher benefits will suffer a larger proportionate reduction, hence the reason to consider a transfer if the member has concerns about the business firm and scheme stability.
The PPF is funded by a levy on schemes very like the Financial Services Compensation Scheme and so as schemes falter the costs on remaining schemes will increase. This potentially has the knock on effect of increasing deficits in existing schemes and so the strain on the sponsoring employer.
The National Association of Pension Funds (NAPF) has already called for government backing for the PPF. However one has to consider that the government i.e. we tax payers have already invested heavily in the banking system; can we afford to supplement pensions? Consultations were undertaken in March 2008 between The Pensions Regulator (TPR), Financial Assistance Scheme (FAS) and PPF, and resulted in an agreed two year time limit on the process of referring cases. That does not mean benefits will emerge in two years, but that the process will be in place to enable the PPF to start work.
We were recently advised (November 2009) of a client who had his pension cut from £20,000 to £16,000 following the move of Woolworths to the PPF. This confirms the reductions in benefits are not only affecting the high new worth clients, who have alternative resources, but also ordinary workers.
Under current rules, the member has no option to transfer out of the PPF and so must accept whatever benefits they provide.
Overall then the member may receive reduced benefits and not at the time expected, totally undermining the guaranteed nature of the scheme and lose the transfer alternative.
Our view as elite financial advisors is: get out now, while you can!

We LOVE you so.. how about liking us on Facebook?..

Powered By Facebook Like Post Plugin

Background It has long been our view that the Defined Benefits Scheme is inactive.
The establishment of new schemes has been a rare thing over the last few years.
The main explanation schemes remain is that formally winding up the scheme crystallises the deficit on the business and could then force the business into liquidation.
Schemes are therefore paid up or closed, meaning the financial planners continue to administer them retaining this lucrative business, but members ceased accruing benefits.
The Pensions Act 1995 was the first in a long line of deadly blows.
Simplification in April 2006 was another deadline at which many failed.
Investment Turmoil and adjustments to the valuation basis have weakened the last few stalwarts further.
There will be no coup de grace; these dying swans will continue: apparently gliding safely, but with much frantic leg work behind the scenes for many years to come.
Data supporting this take
In the winter of 2008 we noted some statistical evidence to confirm this view:
1. AON Consulting published results last August of a survey confirming only 17% of defined benefit schemes remain open to new members. This is usually the first step in the long slow process of closing a scheme and eventually winding up. 2. Watson Wyatt had also completed a similar survey in the preceding months and forecast that 40% of Defined benefit schemes would be closed for future accrual over the next ten years. Our take is this will be even quicker than that. This is generally the third significant step to wind up, the second being reductions in future accrual of benefits for existing members.
How does this concern your clients?
Once the scheme has been closed to new members and is no longer providing future benefits for existing members, the administrators or financial planners will generally start hiving off chunks of the scheme by moving deferred members out reducing future costs. This is the stage when offers of enhanced transfer values (in various forms) tend to be made.
Action points
We stand by our long held perspective that members should choose when they transfer their benefits, not wait until it suits the scheme. It is important to appreciate that under current rules, if the fund falls into the Pension Protection Fund the benefits due reduce and the transfer option ceases.
Our message as elite financial experts is get out while you can!

We LOVE you so.. how about liking us on Facebook?..

Powered By Facebook Like Post Plugin

Just as you all know, the key global stock markets have been extremely unstable over the last year or so.
And it’s likely that you have money invested in one or more of these several investment vehicles: • ISAs
• Personal Pensions
• Self Invested Personal Pensions
• Life company funds
• Unit Trusts
• Open Ended Investment Companies
• Investment Trusts
For example, if you have capital invested in ISAs and personal pensions, you may well have your money invested in up to twenty separate investment funds.
Knowing how much risk your overall portfolio (not just the individual funds) is subject to is a crucial part of investing.
It’s not good enough just to know how the funds may have worked in the past – this just tells you half the story.
What you need to know is:
• what is the overall volatility of the portfolio?
• does this suit the amount of risk you’re comfortable with?
• and, does it suit the amount of risk you NEED to take?
So, the first step is to find out how much of your capital you would be prepared to see decrease before you took any action, positive or negative.
This is your risk tolerance.
For example, if you have £100,000 invested and you don’t need access to the money for 20 years, you may well be prepared to see a fluctuation of up to 25% in any given year.
Next, you need to know what the volatility of each fund is. This may also be referred to as ‘standard deviation’. This one factor will indicate how risky the fund is.
As an example, if a fund has achieved an average annual growth figure of 11%, you may well want a piece of the action. However, if the volatility factor is 22, then the fund’s range of performance in any given year is: • 33% (11+22)
• minus 11%
This may well be too much risk to bear.
Once you know the volatility, you need to link it back to the impact that the loss of capital would have on your short, medium and long term financial plan. You may find that even if you lost 50% of your capital, you would still achieve your income goals in retirement and any other goals.
By knowing this one factor alone, you may well end up making a different decision than you would have done (with your invested capital). I know we’ve looked at the negative here – the reverse may also happen and the higher volatility could mean that you end up with a higher amount of money than you would have done.
The Financial Tips conclusion
I hope you have understood my point – there’s SO much more to investing your money than by simply picking a few investment funds based on their past performance.
Find out how much risk you are REALLY taking with your invested capital. It’s a logical thing to do as you had to earn the money in the first place, so surely it deserves to work as hard and efficiently for you as possible?
Ray Prince is an Independent Financial Planner with Rutherford Wilkinson ltd, and helps UK Resident Doctors and Dentists get the best deals on mortgages, protection and investments, as well as helping them achieve their financial objectives.

We LOVE you so.. how about liking us on Facebook?..

Powered By Facebook Like Post Plugin

wake up one Monday morning with the sun streaming through your bedroom windows and a cup of coffee near your bed. You look over at your clock. It’s very nearly half past eight but your alarm didnt go off. You have a moment of panic. Why didn’t these people wake you? You’re about to step out of bed, then you relax, lie back and breathe a huge sigh of relief as you suddenly remember that this morning there’s no need to rush. You aren’t going to work today. You’re on holiday. In fact you won’t have to go to work ever again unless you choose to because this is the start of your BIG holiday – the holiday that will last for the rest of your life – your retirement!

As you sit up in bed and sip your coffee you think about all the things you’ll be able to do now that you’ve finally retired. This afternoon you’ve organized to play a round of golf with three of your acquaintances. Then in a few days’ time you and your partner are off on a luxury world cruise. It's a trip you’ve been promising yourselves for years but you could never find the time to take so many weeks off work.
You loved running your business, even though it was hard work. However, you’re very glad that you’ve been able to achieve financial independence now, giving you the choice to stop working whilst you’re still young enough to enjoy life and able to do all the things you want to do. You get out of bed and go over to the window to admire once again the gorgeous, gleaming new car you've just bought with part of your tax-free hard cash from your pension, and you congratulate yourself on how great it is when a plan finally comes together!
Is this what retiring is going to be like for you? Have you planned it carefully, and are you reviewing your retirement plans on a regular basis? Many people spend more time planning their next two week break than they do planning their retirement – the longest holiday of their lives.
Just imagine running out of money half way through your holiday. How bad would that be? Think how much worse it would be if it happened half way through the longest break of your life. What could you do about it?
When you’re planning any holiday you have to budget not only for the cost of the fares, the accommodation and the food, you also need to budget for spending money if you’re really going to enjoy yourself. You need spending money on your BIG retreat too, your retirement. How sad it would be to have the time to do all the things you don’t have time for now but to be unable to afford to do them. Only when you’re in a position of financial independence will you really be able to enjoy your BIG holiday.
So to plan for the financial freedom to enjoy your BIG holiday you need to

make a decision: When is my BIG holiday going to start?
How much money will I need? How much can I realistically afford to save each month?
You probably know the old saying, “Failure to plan is planning to fail!” If you haven’t already done so, consult an independent financial adviser and start planning now to make sure you have enough money to really enjoy your BIG holiday of a lifetime – your retirement.
Margaret George is married and lives near Glasgow, Scotland, in the United Kingdom, where she is an independent financial planner or .
She qualified as a financial adviser in August 1993 so she has many years of experience in helping people with their financial planning. She is a partner in Positive Solutions – one of the largest firms of independent financial planners in the UK, with over 1,700 advisers.
Margaret strongly believes that financial planning is all about lifestyle – about protecting your current lifestyle for yourself and your loved ones, and also about helping you to plan for the lifestyle you aspire to in the future. She is passionate about helping her clients achieve these objectives.
Margaret’s qualifications:
BA in Economics and Business Studies from the University of Strathclyde, Glasgow;
MBA (Master in Business Administration) Strathclyde Graduate Business School;
Dip PFS – Diploma of the Personal Finance Society.
You can find more information at http://www.glasgowfinancialadviser.com/ Article Source: http://EzineArticles.com/?expert=Margaret_George

We LOVE you so.. how about liking us on Facebook?..

Powered By Facebook Like Post Plugin

Ask any Independent financial experts  , alternative investments always wielded a certain woo for well-to-do private investors that can also make them appealing to the common man. If premiership football managers can see the benefits of owning a racehorse then it's a clear signal to millions of devoted fans to jump on the bandwagon. Alternative investment opportunities, such as art and fine wine, are now starting to form an ever wider appeal among shareholders. Art as investment, for example, is now becoming more accessible than it has been historically. It has been very expensive to visit the top art exhibitions in the past, but now even this barrier is falling away.
The Armory Art Show in New York is considered by many to be the world’s best art exhibition, and it charges just $20 per ticket. It has grown in attendance from 11,000 visitors in 2000 to 40,000 in 2005. Prices for works of art at this show range from $2,000 to $150,000. The Affordable Art Fair, which takes place in London every March and October, gives investors and collectors access to a truly egalitarian experience. Prices for all of the works of art for sale are less than £3,000.
Russia provides a good example of the opportunities that can be had from art investment. The collapse of the Soviet Union in 1991 created an opportunistic economic climate when it came to Russian art. Moscow now has more billionaire residents than any other city in the world, which explains the capacity for alternative investments. In the past five years, the price of early 20th century Russian art has increased by over 30%.
There is, however, a high cost to entry in this particular market. To buy a piece by Ivan Aivazovsky, Ilya Repin or Isaac Levitan will cost £250,000 to £1m. There are some doubts over the authenticity of Russian art work as well. During the revolution in 1917 many works of art were mislaid. If you plan to invest in this specialist market it could be well worth paying for expert and unbiased financial advice to ensure that you do not get your fingers burnt.
Holding alternative investments in your portfolio can be beneficial for a number of reasons. They provide an important level of diversification when compared to a traditional portfolio containing equities and gilts. A run on the stock market, like we started to see last week, can often lead to a rise in the value of some alternative investments that are viewed as a safe haven for investor’s cash. The risk profile of alternative investments may discourage more cautious investors but they can still play a part in a larger portfolio.
Alternative investments also have the potential to add a new level of interest to a traditional portfolio. In a world where interest in long-term saving appears to have faded, the forthcoming ability for your pension fund to own a Penny Black or two might encourage a whole generation to take a new interest in retirement planning.
The Inland Revenue issued a statement in 1999 about the capital gains tax consequences of investing in wine. Bottled wine is a chattel for CGT purposes. Gains on the disposal of chattels which are also wasting assets are generally exempt from CGT under section 45(1) Taxation of Chargeable Gains Act 1992. The most significant question to address is whether or not the wine in question is a wasting asset. If a bottle of wine is deemed not to be a wasting asset then there are still some exemptions to be had. If the disposal proceeds do not exceed £6,000 they are deemed to be exempt from capital gains tax. If a set of bottles of wine are sold, then this exemption figure applies to the overall sale proceeds rather than the price of any individual bottle.
Top wines from the best vintages have demonstrated their ability to produce outstanding investment returns in recent years. Wine brokers Berry Bros & Rudd provide examples of growth in excess of 450% in a 15- year timescale. However, for many investors the high initial acquisition costs and ongoing storage and maintenance costs of wine will reduce these returns to an unacceptably low level.
The general guideline for any would be alternative investor is to stick to what you love. While objects like art and fine wine might be considered in the same group as a traditional investment by many, they should first and foremost be considered for your own consumption - either with your eyes or your mouth. positives and negatives of alternative investments
Advantages:
o they can provide diversification within a traditional equity and gilt investment portfolio;
o they bring a greater degree of interest and involvement into the acquisition and management of investments; and o investment returns can be spectacular when the right assets are purchased and realised.
Disadvantages:
o art has no intrinsic value. Its value is extremely subjective because it is based on current trends and tastes;
o headline performance figures might not take into account transaction and maintenance costs; o picking a winning art or wine investment is difficult for beginners;
o there are often high costs involved with the insurance, storage and maintenance of both art and wine; and o alternative investments do not often produce income or ongoing financial returns. Fundamental points
o Alternative investment opportunities are growing in appeal among investors and art, for example, is becoming more accessible. o Alternative investments can provide diversification, allow a greater degree of interest and involvement and returns can be spectacular.
o But they do not often produce income or ongoing financial returns, while insurance, storage and maintenance of art and wine can be very expensive.

We LOVE you so.. how about liking us on Facebook?..

Powered By Facebook Like Post Plugin

I personally got a call the other day from my telephone supplier telling me I was a terrific customer (his words) and that I deserved a fantastic new deal.

Why? What’s the catch?
After a 30 minute chat it suddenly occurred to me that as an average-Joe consumer and their “valued" customer I had some considerable power over the simpler purchasing transactions you and I make but are either too small or routine necessities that we just don’t think twice about them. You see, I need a cellphone (mobile phone) to keep in touch with all and sundry and maybe show off to my friends if I happen to be holding the latest piece next to my ear, but this is something I really do not think about too much – it’s routine. To them (the network) I (along with a few million others) represent their life-line, their business and all important profits which can mean make-or-break to their business particularly in these rough times. Every time I am up for renewal they hold their breath; will I stay or will I go with their many rivals? Think about this over a few million of us average-Joe customers! That’s a lot of breaths held! You thinking one everyday? I am thinking at least one every hour!

Cut a long story short, they need you and I more than you and I need them – period. Just so happens we are in a recession so let’s use this to our utmost advantage. Here’s how…

DISCLAIMER ——--——- This suggestion or tip is not to ask you to cheat your providers but merely intended as a way or means to utilise your consumer powers to the fullest.
——-——--

Let me take you back to my telephone situation.
It turned out that from a monthly basic bill of £36 plus extras (and they were expensive extras), they could now offer me ONLY £15 plus extras per month!

Really? Where were you when I missed a payment or two and had to go without my cellphone for weeks 'cause you cut me off?

OK cut the drama.

I found out that the owners/managers/shareholders/directors figured it cost them an average of £200 for every customer they got. They figured it cost them that much to get me in the first place but instead of spending another £200 to get me again they could use their budget to share that said £200 with ME and retain my account hence the big discount on my bill. Apparently this is normal practice in business. Further to that they actually run an affiliate program where they pay £125 commissions to anyone that can refer business their way hence saving a bit from the said £200 acquisition budget. I Googled them quickly and sure enough I could be an affiliate and sign myself up at a cheap rate as a returning customer and still get £125 commission too! I did it quickly.

Now, as I mentioned before, this is not to suggest that you cheat your providers. You MUST ask if you can do this so you stay above board. I asked and they let me. So I did it.

But it goes beyond cellphone. It applies to everything you encounter in life. Utilities, Car Insurance, pet insurance, major appliances, financial advice, airline travel and tourism, your football club season tickets, online groceries, Christmas (or other) gift suppliers, you name it - it applies!

Bottom line is; if they have a client retention program or an affiliate program, best YOU benefit from your own business than some disgruntled agent in a call centre in the middle of nowhere that was rude to you last time you called in (not to mention the LONG waiting times). Simply ask and YOU could save quite a bit! On everything!

Like I said; Times are rough. Times are hard. Save every little bit you can. It’s not what you make but what you save! So, like Starsky and Hutch just "do it, do it”.

Stop spending too much hard earned money on your website. Visit http://www.quicksitemaker.eu for ways to design and market your website yourself saving money.

We LOVE you so.. how about liking us on Facebook?..

Powered By Facebook Like Post Plugin

When the whole credit crunch happened (or started happening) a few of us saw it as a big excuse for the average entrepreneur to throw in the towel and leave their business with a huge pay out. (Legally or illegally). We saw it as a (suspiciously) creative way for the business owner to milk the last finances out of the business and get out – the modern day bankruptcy method for a modern-day entrepreneur.
You see a long time ago someone told me that the average life-cycle for an entrepreneur was this:
1- Come up with a strikingly remarkable business idea from one’s basement or dorm room (think Yahoo,Google,Twitter etc)
2- Be an overnight success and enjoy a very profitable 15minutes of publicity and celebrity
3- When everyone thoroughly knows what your business is about you go public and get a billion or two from the shares you sell
4- Leave the running of the business to the board of directors and live your life on a yacht the size of the Madison Square Garden and chase the Formula 1 circuit for the rest of your life.
5- If 3 above fails, you get yourself acquired by the big boys (think Google buying up mapping and navigation companies to strengthen Google Maps) and hopefully still enjoy point 4 above.
6- OR, if all else fails and you had a decent business for years but just want out because points 3,4 and 5 never happened to you, you blame everything on your share-price. The excuse here is to make it as if the 10p price tag to your bank’s shares is the reason you are going down and not your business practices. We all know the share price is secondary, first you make a sound business then your share price rises or you make un-sound business decisions and your share price plummets. The share price in itself has never influenced your business health and never will. The share price is a result and not a cause! So next time your bank tells you the £3000 you deposited last week is gone because the share-price went down don’t buy it. I hope you didn’t when they said it last year!
You and I may call point 6 the credit crunch but I do hope you see why it’s all rather suspicious. I have a good business head and just do not see why and how a business being touted as the biggest and best in such and such country will fall overnight when everything is above board without any weird accounting practices or underhanded dealings. There has to be more than meets the eye here or should I say what the press presents to us (think Enron except on a global scale).

The whole situation stinks and we need a new school of thought that teaches our MBAs to have responsibility beyond their wallets. A wise man once said that as human beings, “our biggest fear is not that we are inadequate but rather that we are powerful beyond measure.” Let’s use this power for good – financial good for all.

Mr Smith is the owner of JAX Internet, here he writes on the credit crunch situation. Stop spending too much hard earned money on your website. Visit http://www.quicksitemaker.co.uk for ways to design and market your website saving money.

Article Source: http://EzineArticles.com/?expert=Michael_Phiri-Smith

We LOVE you so.. how about liking us on Facebook?..

Powered By Facebook Like Post Plugin

quick word from a financial expert
Background
A Life Insurance Investment Bond is widely available for you to invest in. As with many investments, there are upsides and downsides to using this form of tax wrapper.
One of the main points to bear in mind is that the tax wrapper status of any financial product impacts simply how much tax you will/won’t pay on the investment at outset, during and at the end of the term.
It is the actual funds where the money is invested that determines how much you will get back when the plan matures or when you cash it in.
One of the main good points of the Life Insurance Investment Bond, either onshore or offshore, is that you are able to withdraw up to 5% of the amount invested each policy year without activating what is known as a ‘chargeable event gain'.
Whilst this defers any tax liability to the future (it may not avoid any further tax due), the good news is that each 5% allowance is cumulative therefore and can be carried forward each policy year. For example, if no withdrawals are made in years one to four 25% can be drawn in year five.
You are not able to take more than the amount invested over the lifetime of the bond, therefore if you withdraw 5% per annum the maximum time period for these withdrawals is 20 years.
HMRC treat withdrawals as a withdrawal of capital and if the amounts are kept within the tax deferred allowance there is no need for you to declare them on their tax returns.
As tax on the withdrawals are deferred until the bond or policy segments are surrendered you can defer tax until the most suitable time for your circumstances.
5% Withdrawals
The 5% tax deferred allowance provides a gross equivalent income of 6.25% for a basic rate tax payer, 8.33% for a higher rate tax payer and 10% for a 50% tax payer.
To reiterate though, (and before you get carried away) never forget that withdrawals from the bond are tax deferred and not tax free!
It is possible to extend the number of years that you can take tax deferred withdrawals by taking less than the 5%.
For example, if you take 4% per annum then this can be continued for 25 years without any immediate tax charge.
Reducing Taxable Income
As the withdrawals are treated as a withdrawal of capital they can be helpful when trying to keep your income below certain levels.
Some clients, or their spouse / partner, may have income that hovers around the ‘age allowance trap’ area.
If you are aged 65 or over you have a higher personal allowance, however, this is reduced where taxable income exceeds a certain limit. The limit for 2010/11 is £22,900 and for each £2 of income above this limit the personal allowance will reduce by £1 until it falls to the standard levels.
The withdrawals from a bond do not count towards income for these purposes and so can be useful for providing additional ‘income’ whilst maintaining the higher allowances. This is in contrast with other investments, ie deposits, shares, unit trusts and OEICs where the interest or dividends will be added to your income and taxed accordingly.
Looking at an example, John is 67 and has pension income of £22,000 in the tax year 2010/11. He also has £200,000 on deposit which pays him 3% gross interest, ie £6,000 in the tax year.
This means his total income of £28,000 takes him over the age related allowance of £22,900 by £5,100. His age related allowance will therefore be reduced by one half of this amount, £2,550, bringing it down from £9,490 to £6,940.
If he had invested the £200,000 in an Offshore Investment Bond he can take withdrawals of 2.4% giving him annual ‘income’ equivalent to the net interest from his deposits.
He would have saved £1,710 in tax in the current tax year by maintaining his entire age related allowance (£2,550 x 20%) and deferring the 20% tax on the interest (£6,000 x 20%).
He would also have the flexibility to increase these withdrawals in future years and have potential for some capital growth.
Of course, tax will be payable when a chargeable event is triggered, however, if a lower withdrawal rate is used this can be delayed for some time.
Summary
It is important to note that we have only looked at one or two factors of Investment Bonds in this article and you should take professional advice before you make any important financial decisions.
Our view is that you should always weigh up the pros and cons of any investment in line with your individual circumstances before you proceed. The Financial Tips Conclusion Investment Bonds, whether onshore or offshore, can offer valuable benefits to investors as part of an overall investment programme.
Alongside these products, you should also consider other mainstream offerings such as personal pensions, ISAs, unit trusts, deposit savings and investment trusts. Your local financial adviser should be able to show you quite a few investment choices.

We LOVE you so.. how about liking us on Facebook?..

Powered By Facebook Like Post Plugin

New pensions transfer value calculation basis, which is relevant to defined benefits scheme, was introduced in the Occupational Pension Schemes (Transfer Values) (Amendment) Regulations 2008. This new basis applied from 1st October 2008.

How this currently affects pension transfers
As with all previous changes in Transfer Value calculation basis this has meant that many schemes have been unable to provide transfer value details for some time. The scheme trustees and scheme actuaries have held meetings and discussions to ponder how the new basis impacts on the scheme and how they are intending to interpret it. Once that has been agreed the actuary and his team will create a calculation method – usually a piece of software to undertake the calculation. This will then be demonstrated to the pension administrators who will actually use it to provide the figures we need to offer financial planning advice.
So no transfers could proceed for a while, whilst this was all occurring, and there are still some backlogs, which are continuing to create delays, even though most have started issuing the revised values.
The History

Originally, Pension Transfer Values were calculated by the scheme actuary who assessed the basis appropriate for the scheme, within the Guidance provided by the Actuarial bodies. This Guidance was always covered in Guidance Note Number 11 (GN11).

You may have heard of GN11 in relation to maximum benefits and certification requirements for cash for high earners and controlling directors. The GN11 set parameters for the assumptions needed such as investment return &, growth in RPI and the actuary adjusted the assumptions to suit the specifics of the scheme.

Minimum Funding Requisite

The government decided that there should be one basis for all schemes and invented the Minimum Funding Standard (MFR) which imposed various assumptions on transfer value calculations. The MFR was introduced as part of the Pensions Act 1995 (PA95) and was supposed, as much of that act was, to protect individual members.

The most basic way to explain this is to appreciate the requirements imposed on actuaries. When calculating transfer values, actuaries had to assume all members who had over ten years to the scheme Normal Retirement Age (NRA) were wholly invested in equities. As higher growth rates are generally expected from equities as against any other investment, this reduced transfer values for those with over ten years to retirement.

The corollary was that for those within ten years of retirement it was assumed a proportion of their investment, which increased as they approached retirement, was invested in Gilts. That meant that the transfer values for them increased, as the investment return assumed was lower. This basis applied irrespective of what the actual scheme funds were invested in and so was entirely disconnected from the scheme. Theoretically everyone was therefore treated the same.

In practice, the PA95 imposed so many extra expenses on final salary schemes that it was the beginning of the end of the defined benefits scheme. In fact, therefore rather than protecting members it had entirely the reverse effect, because the costs imposed on employers outweighed the perceived value of the scheme to members. That combined with the downturn in investments led to the massive deficits in many schemes.
The introduction of a new accounting requirement (FRS17), which meant companies had to disclose the actual cost of their pension schemes allowing for future expectations of benefits as well as the real cost in terms of monies paid into the scheme in the year, added a further nail in the coffin of defined benefit schemes.

Future alterations
So the powers that be had to come up with a way of preserving defined benefits schemes. One step was the facility to reduce transfer values reflecting the funding deficit. That meant that individuals transferring away received smaller transfer values, but protected the members that remained behind. It is rather like the Market Value Reduction applied on transfers out of a With Profit fund.

The next step was to introduce some sort of protection for scheme members and the Pension Protection Fund was born. As with all these compensation schemes, it has limits and rules which means it only offers a proportion of the benefits, which is, in practice are much lower than the headline rate. Also, it has to be paid for, which means any improvements in the benefits it provides have to be justified in additional costs.
The other idea was to move away from the prescribed basis for calculating transfer values, which was imposed with the MFR and to a “scheme specific basis”, which was really where we all started!
This idea was first mooted to be effective from September 2005; it actually arrived on 30th December 2005. Prior to that there was, as always, significant consultation. That meant that in the end, rather than a total change with a new more prescriptive methodology, the result was a few adjustments to GN11. These amendments did not result in the much higher transfer values, which had been predicted because there was no alteration in the assumed investments and no change in growth rates assumed.
The facility to reduce the Transfer Value in view of deficits remained, and so the move from a final salary scheme was still likely to involve accepting a transfer value which undervalued the benefits and so created a higher Critical Yield.

The big changes in the assumptions were put on hold at that time. In fact the use of the MFR basis was retained by many schemes as it was available until after the next full actuarial valuation report, which schemes have to complete every third anniversary.

The recent alterations

The next time this was all looked at again was the consultation which started on 6th July 2007 and closed on the 17th August 2007. This resulted in the latest regulations the “Occupational Pension Schemes (Transfer Values) (Amendment) Regulations 2008”. These are the latest rules which govern the transfer value calculation basis effective from 1st October 2008.

The legislation defines various terms including the scheme actuary, member and prescribes the calculation basis.

The calculation of the initial cash equivalent is to be on an actuarial basis and should reflect the amount required within the scheme to provide the members accrued benefits, options and discretionary benefits. This reflects the original declared intention that the scheme should offer a cash equivalent transfer value i.e. of the amount equal to the cost of providing the member’s benefits. The trustees are required to determine the extent to which they take into account the value and likelihood of members taking up options available within the scheme. Options include the facility to commute pension for cash or more spouse’s benefits and drawing benefits before NRA. The Trustees are also allowed to consider whether or not to include any provision for discretionary benefits. Once the basis has been set, it will apply to all members and individuals cannot be treated differently.

The calculation basis is further prescribed in terms of the assumptions which must be used and that advice must be sought from the actuary in relation to economic, financial and demographic assumptions. The legislation says these should be based on the actual scheme membership, but may be influenced by statistical evidence from external sources.

Furthermore, the Trustees are obliged to ensure that the scheme’s investment strategy is taken into account. This is expanded to include discussions with the actuary about the statement of funding principles and the investment adviser regarding the financial landscape. This does mean that it is unlikely the future investment return will be linked 100% to equities and so has tended to result in an increase in the initial cash equivalent for those with longer terms to retirement.

Trustees are required to obtain evidence of all the factors considered, which confirms the fact the basis will differ for each and every scheme. There is also a requirement to review the assumptions. The inference is that this to be undertaken with the triennial actuarial report, though there is a requirement to review if the scheme alters the investment policy or discretionary policy or if the demographic assumptions become inappropriate or new standard mortality tables are published.

Virtually all schemes appear to be changing assumptions every month, by linking one or more of the factors to Gilt Yields or some other index. This means there is a larger variation in the revised transfer value if the transfer does not proceed within the three month guarantee period.

The trustees retain the right to reduce cash equivalents in relation to scheme deficits. There is a requirement to base this on an Insufficiency Report prepared by the actuary. This will usually be prepared alongside the triennial valuation, but can be commissioned at the trustees request at any time.

The legislation does offer an alternative manner of calculating cash equivalents, but as the requirements included specifically state the result must be higher than that obtained from the usual method, it is unlikely to be used by any but the most generous types of scheme. That probably means it will be used by the various statutory schemes which have the advantage of being backed by the tax payer.

All transfer values are to be accompanied by the usual caveats regarding the need for financial advice and must be produced within three months of request and guaranteed for three months. On return of the discharge forms, schemes do have up to six months to actually pay the transfer value.

We have noticed that some schemes have undertaken further full formal reviews one year one i.e. as at October 2009. The results we have seen so far indicate reductions in values reflecting the upturn in Gilt Yields, following the reduction in their capital cost.

One other new idea becoming more prevalent is to charge the member a fee for recalculation of the transfer value when the discharge forms are submitted outside the three month guarantee.

How does this affect you?

Transfer values can alter significantly and so swift processing of cases is key. Do please get in touch with us as soon as possible after you obtain the transfer value and the initial go ahead from the client. We will endeavour to get the report completed in good time. This saves an enormous amount of work and heartache in terms of reviewing revised values and fees imposed by schemes.
Comparing the Critical Yield

Over the last few years we have little option but to accept the transfer value being quoted by the scheme. On occasions, we have managed to persuade schemes to review and increase figures, but this has been rare in the last couple of years. Now the whole process is more subjective, we have the option to question and wrangle and potentially improve the fund being offered.
This does rely on having good information and an accurate assessment of the Critical Yield.
* If you are still opting for the free Transfer Analysis from a series of providers and accepting those as an accurate estimate of the position, beware, they are inaccurate and so invalid and undermine the suitability of your advice.

* If you are obtaining an accurate assessment from one of our competitors, all well and good, but do you have the time and ability to do battle with the scheme to ensure they are giving you a true cash equivalent.

* If you do the whole thing in house, are you maintaining levels of accuracy with regard to the information input and do you have in place a true four eyes checking system?

How can we help?

We offer a full financial planning service:

* Gathering the data,

* Preparing the transfer analysis to the highest possible standards to obtain an accurate Critical Yield.

* We then prepare a Suitability Report which reflects the wishes and needs of your client and sets out not only the recommendation, but how it meets those desires.

* Within our team, the four eyes principle is automatically retained, as at each stage i.e. the data gathering and report preparation the data is reviewed and double checked.

* We provide a revised Transfer Analysis where the cash equivalent value changes within our fixed fee.
* We can assist with negotiating reviews of transfer values, where the figures do change. This is subject to additional fees where appropriate.

* Finally we undertake a formal sign off of the transfer and return the entire record to you electronically, so that you can incorporate it in your filing system.
* We only have contact with your client if you want us to – you undertake the fact finding and the final presentation, we do the donkey work!

If you think we can help, please contact us hdclimited@btconnect.com or 01892 838 917

We LOVE you so.. how about liking us on Facebook?..

Powered By Facebook Like Post Plugin