I delivered a training session recently that got me thinking about the drawdown transfer rules and a number of recent high profile investment issues.
When a client is transferring a drawdown pension, HM Revenue & Customs rules tell us that the “relevant drawdown fund” must be transferred in full and on a “like for like” basis.
This means the drawdown fund cannot be split or partially transferred and, if it is flexi-access drawdown, then the receiving scheme must receive flexi-access drawdown funds.
There is an exemption where a client wants to use part of their drawdown fund to buy an annuity – otherwise these rules apply.
The first rule made a lot of sense before pension freedoms.
Splitting a capped drawdown fund would be complicated and lead to extra reviews of maximum income limits, at a cost to the client.
However, it is now causing problems post-2015, where we have more people in drawdown than ever before and more chance of someone holding an illiquid and non-transferable asset.
You would be forgiven for thinking that illiquid and non-transferable investments were only issues for those who invested in higher-risk or unregulated investments.
But there have been a number of recent examples involving more ‘mainstream’ investments that thousands of retail clients might hold within their self-invested personal pensions and drawdown funds – and some of those may be looking to transfer.
Consider shares in Carillion and Patisserie Valerie.
Although the liquidation for Carillion began in January 2018 and the shares have all but been confirmed to have no value, some brokers will not remove the shares in case the process miraculously raises enough to produce a small pay out.
If the shares are not removed, anyone with a pension in full drawdown who wants to transfer could be prevented from doing so.
If HMRC could consider a relaxation in the rule that a drawdown fund must be transferred in full, that might prove welcome respite for those looking to transfer to another provider.
Woodford – the next episode
As we know, no trading is allowed as the fund is suspended.
Shares could be transferred – but only if both the underlying client (pension member for a Sipp) and the share class held remains the same.
The requirement to transfer all of the drawdown fund together would be achievable if there was one universal share class.
However, we live in the age of “superclean” and commercial agreements barring other brokers from holding share classes which are exclusive to others – like Hargreaves Lansdown in the case of Woodford Equity Income.
HL has waived its platform fee for the fund, but share class changes are not currently allowed by Woodford Investment Management.
So clients holding the exclusive share class in their drawdown fund will be prevented from transferring away. The fund cannot be transferred, nor can it be left behind thanks to the wider pension rules.