I bumped into some friends at the DWP this week. They were waiting to talk to some civil servants about Defined Ambition (and especially about CDC, they were actuaries). I was going to see the workplace pensions team about DC (I’m not an actuary).
Next week I’ll be talking to politicians ,civil servants and to think-tankers about all the new retirement options we’ll be getting from 2015 and trying to make sense of them.
So I’ve been running through them in my mind and trying to do a 5 minute pitch to myself on how we can present them to people (at guidance sessions).
There are some useful papers out from HMRC, the most accessible being the Draft Guidance on the new drawdown rules.
But if you don’t fancy spending your time browsing , here’s my starter for ten
Update on pension options for those with DC pensions
There is of course the old favourite – the annuity – supplemented now by the short term annuity (available from an insurer near you). I don’t get short term annuities which seem to be a bit of a muddle but that’s not the point of the blog.
The new favourite will undoubtedly be the newly revamped flexible drawdown , the one that lets you pay your tax and buy an annuity.
And now there are what we call FLUMPS where you get your tax free cash paid out on the drip and you only “crystallise” what you spend from your pot. Unlike flexible drawdown, this variant allows you to keep your options open and keep your rights to tax free cash invested in your pension pot.
Keeping options open may be very important, especially as the CDC option is still under discussion and won’t be available to 2016 at the earliest.
CDC is – to us pension folk – a bit like the mansion on the hill. We can see its plans (the Draft Bill) and can talk with the DWP about planning issues, but it’s going to be a couple of years till anyone moves in and it hasn’t got final planning permission anyway.
Worst of all, as some naughty non-actuary keeps pointing out. The mansion appears to be planned without access! The idea is that employers buy into the mansion even though they’ve got a perfectly serviceable pension which is building benefits under auto-enrolment. Buying an alternative (pension) residence for employers looks a bit extravagant and a bit risky (as they’ve spotted that CDC runs a risk of being considered DB at some time in the future.
The employers looking at the CDC Mansion on the Hill do however see it as a great retirement home into which they can move their superannuated workers when they start winding down into later life.
Unfortunately this option is not currently in the plans, there is no way that CDC can take transfers into it unless the member has been in the employ of an organisation that has sponsored such a scheme. The CDC is a closed shop- or should I say Mansion with no gates.
Until those drafting the Pensions Bill wake up to this problem and draft legislation to allow anyone to be able to join a CDC scheme (provided they have pension benefits to transfer in) CDC looks like an expensive folly (and for once I agree with John Ralfe here).
But back to the new annuity options with which I started. These are not part of the CDC legislation and it’s unclear whether the Treasury even had CDC in mind when drawing them up. As we don’t know whether the mansion will be built or if it will ever be occupied, the pragmatic Treasury drafters are probably right to concentrate on the here and now- and what people from 2015 can actually do.
But what I do see in the new Flumps (“an uncrystallised funds pension lump sum” to use Treasury-speak), is that they allow you to keep options open.
There will be many people next year who will be reviewing their pension options- many in drawdown and many contemplating it. There will be those with DC AVCs from DB schemes and those who are coming into the retirement zone for the first time (e.g. the over 50s). For all these people, the choices ahead will be complicated.
It is right that the Government has offered Flumps, it looks a great alternative to the current drawdown product and it is a proper pension product.
It is right that the Government is paying attention to the recycling issues (they may have to reduce the AA still further to protect other taxpayers)
It is right too that it presses on with CDCs.
But it is absolutely imperative that whatever is built or planned for by April 2015 has certainty about it at April 2015.
Especially we need to be clear as to whether CDC is an option from 2016 and how people will be able to use it .
And we need to be sure that the choices we take in 2015 about our retirement income are made with full information on any restrictions those choices create on future options.
As I talked with the actuaries in the lobby of the DWP’s offices, it became clear that we need people who understand both the individual choices and the corporate decisions and who can ensure that we don’t build mansions that no one can access. We need to be sure that individuals have the same options in retirement whoever they worked for and that money can move from individual to collective schemes and back again without impediment.
I fear that those with a collective agenda and those looking at individual solutions are (as they are in Holland) a pole apart and that the loser in a “non-joined up world” will be the pensions saver.