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T
v T (1998)
In this case the couple were married for 14.5 years and at the
time of divorce
they had no children. The wife had worked for 7 years, was entitled
to £175,000 to purchase her own house and 50% of £36,000
of join savings. She was also entitled to £22,000 per
annum in maintenance until her remarriage or death, reducing
to £17,000 after a year assuming she could earn £5,000
per annum herself.
The court held that the law did not require the court to make
compensation for loss of pension rights, despite the request
from the wife for an earmarking order on her husband's pension,
and compensation for potential lost widows pension. Only the
husband's death
in service benefits were earmarked. The Judge considered
the valuation method used by providers being the cash equivalent
transfer value (CETV)
but questioned the possibility of finding an accurate value
and therefore whether the CETV
Method was worthwhile.
Tax
free lump sum
When a pension is drawn at retirement taking the cash commutation
option, a lump sum will be paid tax free.
Since A-Day, the Pension
Simplification rules introduced from 6 April 2006 allow
a tax free lump sum of 25% to be taken from all pension arrangements.
This includes an occupational pension scheme such as a defined
benefit final salary pension, money purchase scheme, Additional
Voluntary Contribution (AVC)
or FSAVC, retirement annuity policy (RAP) and contracted out
protected rights such as SERPS and S2P.
Previous to A-Day, a defined benefit final salary pension tax
free lump sum was dependant upon a formula based on the members
final remuneration and the number of years in employment.
For defined contribution schemes such as personal
pension stakeholder pensions or occupational money purchase
schemes the tax
free lump sum is currently 25.0% of the fund value at retirement
and the balance can be used to buy a compulsory purchase annuity
or pension
annuity. From the age of 75, it is also possible to switch
to an Alternatively Secured Pension (ASP) rather than purchase
an annuity. With an ASP
the individual can continue to withdraw an income without committing
their pension fund and on their death the proceeds of the fund
can be transferred to their beneficiaries.
For some individuals an income from the whole pension fund is
required. Based on annuity
taxation, rather than draw the income from the pension fund
and pay tax at 20% for the tax year 2008/09, the annuitant should take the tax free lump
sum and use this to buy a purchase
life annuity. By doing this, say for a 65 year old, about 4/5ths of the
income is deemed by HM Revenue & Customs to be a return
of capital and therefore tax free and the other 1/5th
is interest and taxed at the savings rate of 20%. This can
noticeably increase the income to the annuitant and is payable
for the rest of their life.
Temporary
absence
An occupational pension scheme such as a final salary pension
will usually allow an employee to continue as an active scheme
member even though he or she is not actively at work due to
an illness or taking a sabbatical. The maximum period for such
temporary absence is 30 months. During this period retirement
benefits continue to accrue and the employee remains covered
for death in service benefits.
Temporary annuity
This type of annuity is available for a lump sum payment only
such as to a purchased
life annuity, not a pension
annuity, and the benefits payable for the fixed period chosen
or until the death of the annuitant, whichever is the sooner.
Therefore a temporary annuity is paid for a fixed period of
time, say 10 or 15 years, and once this time has elapsed or
the annuitant dies, the annuity payments stop. Temporary annuities
have a shorter period of payment than lifetime annuities and
the income paid for given lump sum is greater.
TEP
market
An endowment policyholder that wants to realise the cash value
of the policy can achieve this by surrendering, or selling the
policy on the traded endowment policy (TEP) market.
The advantage of the TEP market is that for any with-profits
policy, a buyer will usually pay a higher value for the policy
than the value received on surrender from the provider. Therefore
the parties should seek advice from an independent
financial adviser (IFA) before encashing the endowment policy.
The advantage to the buyer of a with-profits policy is that
the eventual yield on maturity can be much higher than that
produced from an interest bearing security, although the buyer
will have to be prepared to pay the premiums to maturity. There
may also be a windfall for the buyer if the original owner,
that will still be the life assured, dies before the policy
matures as this money is payable to the buyer.
The acquisition will mean it is no longer a qualifying
policy and the buyer will be subject to capital gains tax
(CGT) and income tax on the maturity of the policy.
Term
certain annuities
Since A-Day and Pension Simplification rules from 6 April 2006,
where an individual is taking income
drawdown it is possible to purchase a term certain annuity
for up to 5 years. The income from the term certain annuity
counts towards the maximum income withdrawal allowable under
income drawdown up to the age of 75. All term certain annuities
must end by age 75.
TESSA
Tax-exempt special savings accounts (TESSA) were launched in
January 1991 as five year savings accounts allowing the investor
to receive the interest gross without the deduction of tax as
long as no capital and not more than 75% of the interest is
withdrawn by the end of the five year term. TESSAs were replaced
by the Individual Savings Account (ISA)
from the 6 April 1999.
It is no longer possible to start a TESSA, however those accounts
that existed at 5 April 1999 were allowed to continue to maturity.
Unlike ordinary bank or building
society accounts, TESSAs require the individual to lock
in the deposit monies for a period of five years in order to
receive the tax benefits.
When a TESSA matures the investor is allowed, with 6 months,
to transfer the capital of up to £9,000 to a TESSA-only
ISA. This is in addition to the normal annual limits applied
to ISAs and any interest in the TESSA could be used to invest
in these limits.
Tied agent
In the context of the Financial Services Act 1986, a person
or firm that advises on and is only authorised to sell the products
of a single life assurance company is called a tied agent. Under
the Financial Services Act 1986 now the Financial Services and
Markets Act 2000 (FSMA)
such advisers must indicate to a prospect that they are tied
and can only sell the products from one company. A tied agent
is different from a person that is employed by an insurance
company and is usually known as a broker.
Transfer
value
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.
Transfer
value analysis system
Introduced from 1 July 1994 and a method specified by LAUTRO
on the 1 January 1995, now the Financial Services Authority
(FSA),
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
pension scheme.
Trivial
pensions
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
in payment;
•
Pensions already in payment are valued
at £25 capital for every £1 per annum gross
pension;
•
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.
Trustee
Act 2000
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:
•
Have regard
to the suitability of the investment for the trust and
the need for diversification;
•
Monitor
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.
Underfunded
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
members.
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.
Unfunded
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.
Unit
linked annuity
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
short term.
Unit
trusts
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
fund managers.
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
suitable.
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