Changing allocated income stream providers
Q: One of my clients is concerned aboutthe performance of his allocated pension. Although I’ve explained (yet again)about the volatile nature of markets, hehas lost faith in the current providerand insists on a change. Will this affecthis deductible amount, and what otherissues should I consider before actioning his request?
A: Deductible amount
There will be a change in the deductible amount, or tax-free portion of income payments each year, because this is recalculated when an allocated income stream is commuted and rolled over to a new one. The impact may be positive or negative, so it is important to perform the calculations before the commutation takes place.
The deductible amount is determined by dividing the undeducted purchase price (UPP) by the owner’s life expectancy for these products. Depending on when the income stream commenced, the components making up the UPP may change. Be particularly careful with pre-July 94 income streams.
Also, life expectancy tables have changed for income streams commencing before January 1, 2000.
Income payment minimum andmaximum
The minimum/maximum income levels for the new income stream will be prorated for the remaining months of the financial year. You will need to ensure the client’s income requirements are still met.
Reasonable Benefit Limits
Clients who were nearing their lump sum reasonable benefit limit (RBL) when the original income stream commenced may run the risk of exceeding the RBL on changing providers, because the amount counted will be revised if it has been going for more than a year — again a calculation needs to be done first.
Cost
Consider any exit, entry fees or other costs associated with the transfer, which may negate the benefit of potentially improved returns.
Justine Harris is manager, technicalservices with Integratec.
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