Many people have defined benefit rights (commonly called “frozen pensions”). Some people continue to build up defined benefit pension rights, most are in Government backed schemes. A large number of people are enjoying pensions from theses defined benefit schemes.
If you are receiving a pension , you are in a very strong position, because of “priority orders” you are the last group of people to see your pension reduced if the scheme fails. If you have yet to draw on your pension, you may not be so lucky. If your scheme runs out of money, you may find yourself with reduced benefits paid, not by your trustees, but by the Government safety net – the Pension Protection Fund.
If you are receiving an occupational pension , you cannot sell your rights to the regular payments and get a lump sum instead. There are moves to make this possible if have purchased an annuity but for employer sponsored schemes a “pension is a pension“.
But if you are still to receive your pension , you can transfer the value placed on your pension rights to another type of pension, one where you can take all your money however you want to.
You’ve always been able to take a partial transfer of your pension rights – up to 25% of their value (depending on the generosity of the scheme actuary who values these things). This is known as cash commutation.
You will still be able to take all of your pension as a transfer value, unless its in a Government some unfunded scheme like the Civil Service pension.
And now , some schemes are saying you can pretty well decide how much of your pension you want paid as a “guaranteed” income and how much you’d like to do with as you please. This is going to be known as a partial transfer.
There is something that you as a member need to understand. Although trustees are supposed to act for you, they cannot always protect you from your taking the wrong decisions. It may be in the general interests of all members of the scheme, that choices such as transfer values, partial transfers and cash commutation are available, but it may not be in your particular interest to take them.
The Government want trustees to be responsible for ensuring that you get financial advice that is suitable for your circumstances but trustee organisations such as the NAPF are pushing back on this, saying that they cannot be responsible for deciding what is in your best interest on a case by case basis.
Only you can decide what’s best.
It’s up to you to decide what the value of the promise from the scheme is – TO YOU. You might want to work out how much it would cost to provide such a guarantee from an annuity (go to an annuity provider and get a replicable quote). You might want to work out how much you could draw from the transfer value and for how long (tricky but possible if you have a good adviser). Or you might put your finger in the air and make a guess.
I can’t tell you what to do. But I think in reading this, that you’ve worked out that putting your finger in the air and making a guess is a pretty poor way of taking a decision that will affect the rest of your life (and probably the lives of others).
Why Advice and Guidance matters.
The arguments that are raging in pension circles are about how to get people to engage with these questions , make informed decisions and how they can make the best of the decisions they have made. What we call Engage-Educate-Empower.
It matters because if we don’t get this support right, ordinary people will become prey to all kinds of market forces that are anything but benign.
Let’s just look at some of the temptations out there;-
- Some Employers would like you to take transfers from schemes – especially at a level lower than they’re worth – it’s called de-risking the pension balance sheet
- Some Trustees would like you to do the same, it reduces the strain on the scheme’s finances and makes for an easier life
- Some reputable advisers would like you to transfer money to their management so that they can earn a living out of helping you
- Some scammers would like you to transfer money to their management so they can rip you off.
It is very hard to know what is in your best interest, very hard to know who is really on your side.
Everyone will tell you they are your friend, but who can you trust.
In my opinion, you can only trust yourself and your only way to protect yourself and your family from you making the wrong decision is by taking good quality advice from truly independent sources.
Such sources exist. The Government is launching a new service to help you with your retirement options, this service is called Pensions Wise. You can access it from one of 40 Citizens Advice Bureaux around the country or from the Pension Advisory Service.
The Pension Advisory Service (TPAS) is particularly helpful. If you have a difficult question (and these questions are difficult) they will probably refer you to a financial advisor or TPAS.
TPAS will – if they can’t answer all your questions refer you to a financial advisor, but it is worth taking guidance from TPAS in the first instance. You don’t have to wait till April, you can call them today and see what they say.
A note for employers and trustees
If you are reading this as an employer or as a trustee and you are responsible for communicating options to members at retirement, you might like to follow this video offered by the NAPF which explains what you need to be telling occupational scheme members about their new freedoms
To be honest that video is coma inducing at best, I know it is not for Joe Public consumption, but even for us hardened hardened pension professionals it would take some “iron will” to get through it.
Gerry, it is factually correct and while it ain’t Martin Lewis, it is all I can find. Richard is a good bloke- I ran into him this morning so I’m sticking with him and his video!!!
It remains to be seen how effective and useful the new Guidance Guarantee service will be, but it would appear that it will only signpost options rather than allow an individual to benefit from someone evaluating their options. You are right that ultimately the only person to trust is yourself, but sadly most individuals will be “sticking their fingers in the air and guessing” if they make decisions of such importance without professional advice to back up and support what they learn from the new guidance service. It’s a tricky decision and a pity that our regulators insist on an “all or nothing approach” to advice. The cost of giving full advice is such that many clients who could otherwise benefit from it are given poor value because of the amount we advisers have to charge to break even and make a profit. Guidance is fine for simple decisions but complex decisions benefit from informed advice and recommendations. It is a shame that so many people who need advice are priced out of receiving it.
I quite agree Brian
Give the guidance services a chance. In particular the face to face service to be offered by Citizens Advice will be free and impartial and will aim to convey the choices people have to consider so that they can go away empowered to make a decision with or without subsequent IFA advice. I just hope people make use of the guidance services.
So do I Eleanor. The worst thing would be for them to de discredited – I hope I’m not doing that – there’s far too much of that about!