And last question John: if the scheme commutes the negative DC using 17.3 at age 67 to reduce the pension would you agree the same commutation factor should be use for pension commutation for a lump sum? At this moment the scheme uses 12 for pension commutation; not fair!
— Eugen Neagu (@BespokeFS) March 5, 2019
Eugen is right and Eugen in wrong. Eugen is right to say that commutation factors aren’t fair and wrong in thinking that they should be.
Some time ago I worked out that one of the key drivers in designing pensions is “what the scheme can get away with”. When it comes to the taking of tax-free cash in exchange for pensions , schemes can get away with plenty, even an exchange rate (comutation factor) half what it should be. Why? Because people will take any old deal so long as its tax-free and because (as Steve Webb used to say) cash is sexy – pensions ain’t.
So what can we do about it?
The Government wants us to be pensions savvy. It wants it so much that it has closed down the pensions advice service and the money advice service and opened up a new service
The Single Financial Guidance Body will from April 6 be known as the
“Money and Pensions Service”.
— Josephine Cumbo (@JosephineCumbo) March 4, 2019
Not the hardest thing to work out, the new service won’t have advice in it.
So the message to us is, don’t expect the Government to advise you what to do, you’re facing an unfair pension system and it’s up to you to make the best of it.
You could of course pay for advice and this is the kind of hocus pocus you could get served up…
— Josephine Cumbo (@JosephineCumbo) March 2, 2019
The idea that a 30 year old doctor should go slow to avoid the possibility of paying more tax on pension contributions is the kind of nonsense that comes from tax consultants but not from people with common sense. Yet the medical journal Pulse, which most Doctors read, are feeding these ideas up and junior doctors are reading them.
Doctor heal thyself
You cannot rely on the Government, they’ve de-risked their advice service as advice was too risky, you won’t get advice from them.
You can’t rely on hocus-pocus tax specialists and financial advisers (especially if you access them through your medical press).
You can’t rely on fairness, because pensions aren’t fair.
Doctor heal thyself.
Why pensions are seldom fair.
There is a sugar-coated pill called “fairness” which is delivered to people in pension schemes like the NHS. These schemes are only fair to people who understand them, and very few people do.
I didn’t commute the tax-free cash on my pension and I am now – after 3 years – about 10% of the way into drawing a pension that is going up remarkably fast (thanks Zurich).
I did what was fair to me and ignored the sexycash and it’s being tax-free as what I needed and need is replacement income (to do the exciting things I’m doing today).
I worked it all out for myself and it wasn’t that hard in the end, it came down to a few choices and , once I knew what was going on, I was able to make those choices.
But what’s really unfair is that most of us, most of the time, make these decisions without knowing the consequences.
And what’s most unfair of all is that for most people, there is no pensions expert available to do the analysis that Eugen did.
Eugen is right to point out the inequity in pension factors, but he’s naive to think that those setting them don’t know they are unfair. They do!
People who design, manage and sponsor pension schemes like the NHS know exactly what they’re doing. What is unfair is that so few of their customers are in a position to play their game.