PADA highlights issues for non-UK savers

UK - The Personal Accounts Delivery Authority (PADA) has admitted there could be issues for non-UK residents in the future when it comes to accessing savings held in personal accounts.

In its latest consultation on 'Securing a retirement income', PADA stated it wanted to provide members living outside the UK when they retire with "an appropriate level of choice in how they access their pension savings".

As a result, PADA has set out what it claims to be the most practical options available to non-UK members:

Buy an annuity in the UK from an insurance company that is permitted by the FSA to conduct insurance business in the UK; Trivially commute their funds under UK legislation, which is equivalent to 1% of the lifetime allowance - frozen at £1.8m until 2016 - which would be a maximum of £18,000, and Transfer their retirement savings into a qualifying recognised overseas pensions scheme (QROPS) in line with HMRC's rules

The report admitted these solutions could raise particular issues for non-UK members because "it is not possible to transfer pension benefits to some non-UK countries under HMRC's rules. In addition, insurers may not be able or willing to pay income from annuities in all possible currencies".

To try and combat this, PADA revealed it is seeking views on how non-UK members can access their retirement savings in a "convenient way", and how the issues raised by the consultation could be addressed.

The consultation also placed significant focus on how to avoid leaving members with "stranded pots" of small savings that do not qualify under the trivial commutation rules, as Tim Jones, chief executive of PADA, claimed this would be "the single biggest issue" in relation to securing a retirement income in the first decade of personal accounts.

He pointed out a key objective of personal accounts is to deliver a low-cost scheme, and as the process of annuitisation can be quite expensive PADA is looking to use new business processes and technologies, especially online and digital media, to try and reduce costs.

The consultation suggested a lifetime annuity would be most appropriate for members - particularly as in the early years retirement pots will not be sufficient to make income drawdown appropriate - and would provide information about the 'Open Market Option' (OMO) but will also offer a "focused choice" option which will highlight a panel of providers able to quote for annuities as low as £2,000 - the limit at which stranded pots of savings can be commuted into cash under certain circumstances.

However, Jones pointed out this is "not self-annuitising, and it is not bulk purchase annuities through personal accounts", emphasising setting up the panel would not constitute the giving of financial advice.

"It's a way of getting members to reach an annuity," sais Jones.

"This is our way of achieving zero stranded pots. We're trying to make the economies of a £2,500 annuity work."

Jones suggested the panel would work by reducing costs on both sides through streamlined business processes which, at the moment, are "bespoke and expensive", and claimed the scale of personal accounts would make it an attractive business opportunity for annuity providers.

"It's a bit about cost reduction and a bit about simplicity," he added.

At the launch of the consultation, Jones also suggested PADA could also help employers with recommendations on the minimum levels of contributions needed to ensure they meet the employer duty - to be introduced in 2012 - of contributing at least 3% of banded earnings.

He claimed the problem is there is no definition of basic pay, stating "it does not exist and it is unenforceable", though added this will not stop employers wanting to use what they class as basic pay in their calculations.

"We are looking to help by saying that if you want to do this we recommend you use these minimum percentages, and then at the end of the year we'll help you with some kind of automated check. We would want to work with them to make sure they are meeting the employer duty minimum and to automate it as much as possible," said Jones.

He acknowledged most of the final decisions, including decumulation processes and the investment strategy of the fund, would be made by the trustee corporation of the scheme, but while he said in October that this was a priority he confirmed the earliest point that the trustees would be in place is "some time in 2010". (See earlier IPE article: PADA reveals more on personal accounts future)

He pointed out the trustee corporation cannot exist before the scheme order and rules have been laid and passed in secondary legislation, and the consultation on this - and investment strategy - will not be published until Spring 2009.

As a result, Jones said the consultation processes on decumulation and investment strategy are part of PADA "parcelling up advice" on these issues ready to pass to the trustees.

The consultation on retirement income begins today and will last until 4 March 2009, with a summary of responses expected to be available by 4 June 2009, while the two final PADA consultations on investment strategy and the scheme order and rules will be released at the same time in the spring.

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com