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   T - U
   Transfer value    Trustee Act 2000    Unit linked annuity
   Trivial pensions    Unit trusts    Underfunded
   TVAS    UURBs    

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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.

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.

An individual should first consider guaranteed annuity and compare this to a unit linked annuity. The guaranteed annuity has the option to use an open market option to search for the highest pension annuities, adding all the features necessary such as spouse's income, escalation and frequency of payment. Once you have purchased an annuity it cannot be changed, so learn more about annuities, compare annuity rates and before making a decision at retirement, secure a personalised annuity quote offering guaranteed rates.

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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