This is a really excellent note from the Ferret
This note, and the linked notes below, highlight the need in pensions’ guidance for thorough examination and modelling of individual circumstances and the value of the presentation of options in an easily understood format. The modelling and graphical presentations, in the linked notes, have been produced using Ferret Information Systems’ pensionsForward software.
PensionForward, has been developed to handle the complex calculations needed, and will be of help in providing guidance in practice.
The delivery partner must discuss with the consumer their relevant options and provide key facts and information on the consequences of each of those options1
Whatever the option favoured by an enquirer it will have consequences. These consequences, if the enquirer understands them, may be such as to make them reconsider or change their mind about initial choices.
If they are to make properly informed choices about their options, the enquirer will need to know a number of facts including
Their current tax and benefits situation
The effect on their overall income of the options open to them – immediately and in the
The effect of different amounts of income and capital taken from the possible options
The effect of future planned changes in the rules of tax and benefits
What would be the effect now and in the future of planned or unexpected changes in
These are complex assessments and much will depend on them. (See Pensions Guidance – Showing the consequences of options Ferret Nov 2014).
Some examples given in that note illustrate how personal circumstances can radically affect the wisdom of particular pension choices. There are extreme cases in which taking income from one’s pension pot will make zero difference to net income – or even reduce it, and even more spectacularly where taking a lump sum reduces net income by nearly 50%. More commonly however for those receiving benefits there are impactswhich make the uplift in income much less than the amount taken from the pension fund.
At present some 320,000 people with defined contribution pensions retire each year. In the new situation this number may be boosted by those who opt to convert their defined benefit entitlement to defined contribution in order to take advantage of the new rules, and possibly a considerable number who wish to start taking some income from their fund even though they are not retiring in the traditional sense.
The consequences of the options will depend on individual circumstances and general advice in this area is relatively useless, if not misleading. In order to achieve the best results for enquirers from a guidance session, it will need to gather and take into account not only the pension options that exist and the personal priorities and preferences of the pension holder but also a number of other pieces
1 Retirement reforms and the Guidance Guarantee, July 2014 – FCA Consultation Paper CP14/11 2.8Pensions Guidance – Information and Consequences © Ferret Information Systems 1.0 November 2014 of personal, but objective, information which will affect the net value of the option selected.
Aparticular concern is the impact of the choices on benefits entitlement.
The consequences of a choice about the best use of a pension pot are not necessarily immediate.
The enquirer may have intentions about actions at a point in the future, there may be changes in rules about tax and benefits which will come into force at an already determined future date and there may be different sets of rules which will apply to an enquirer when they reach a particular age.
All of these need to be understood and applied to the specific circumstances of an enquirer. (SeePensions Guidance – Considerations of the future Ferret Nov 2014).
The government have also recognised the risk that citizens would make poor choices because offailing to understand the interaction between the social services and benefits systems and the new opportunities to draw cash from their pension funds. Their specific promise reads:
“The government wants to ensure that individuals are able to make an informed decision that best suits their personal circumstances and risk appetite for the duration of their
retirement. Welfare and social care will therefore be covered by the guidance service sopeople can, for example, take account of the likelihood that they may need to pay for social
care in the future.” 2
Ferret’s systems can integrate proven assessments of entitlement and costs in residential anddomiciliary support, disabled facilities grants and other areas into a comprehensive information tool.
Ferret has, for over thirty years been the leader in advice and information systems about benefitsand other entitlements. It is now recognised as leading in impact and affordability modelling in thisarea and in the integration of benefits and financial advice. Its expertise has now been applied indeveloping tools to produce accurate, speedy and inexpensive assessments of the current and futureeffects of pension choices. (See Pensions Guidance – Information Tools Ferret Nov 2014).
These tools, which run across a variety of platforms, are available in versions for use by guidance staff and for use by enquirers themselves. They can be used in off-the shelf versions available now, integrated into other systems or tailored to meet exact requirements.
Ferret Information Systems Ltd
4 Coopers Yard
Telephone: 029 2064 3333
Fax: 029 2064 3331