“Pension Freedom” as announced by the Chancellor George Osborne is recognised as perhaps the greatest shake up in pension legislation ever. The industry did not see this coming and so was unable to prepare for the implications. As pension specialists with years of experience we know that the logistics and implications of this new legislation would be complex, especially as most financial advisers do not understand or specialise in the complexities of Occupational Pension Schemes.
The opportunities for members of Occupational Pension Schemes following the new legislation are significant. The legislation applies to everyone, how it affects individuals varies massively depending on personal circumstances.
In order to clarify the framework there follows basic responses to many questions raised by our clients at the outset of our relationship regarding Occupational Final Salary pension benefits. The responses are not detailed but provide a starter to clarify the basics, we hope this helps.
OCCUPATIONAL FINAL SALARY PENSIONS WHAT ARE THEY?
A Pension Fund set up by the Employer, members generate a promised level of income payable in the future, this being the scheme retirement date, typically 60 or 65.
CAN I TAKE MY PENSION BENEFITS FROM THE SCHEME BEFORE THE NORMAL SCHEME RETIREMENT AGE?
It depends on the scheme rules. Often there is a provision for this option; generally a penalty applies, significantly reducing the pension as a result of taking income before the normal retirement date, currently the earliest benefits can be taken in normal circumstance is age 55.
I HAVE PENSION BENEFITS AND DO NOT WORK AT THE COMPANY ANY LONGER WHAT HAPPENS?
The pension will be preserved in the scheme and will increase in line with scheme rules and regulatory requirements. Benefits will become payable at the normal retirement age of the scheme unless alternative arrangements are made.
WHAT HAPPENS IF I DIE BEFORE I TAKE MY PENSION?
The scheme rules will dictate what happens and who may receive benefits.
WHAT OTHER BENEFITS MIGHT THE SCHEME PROVIDE?
Typically the scheme will provide Spouse and/or Dependents benefits, while some may also provide a lump sum. The amount and form of benefits will be dictated by the scheme rules. Details will be in the scheme booklet.
DO I HAVE ANY CONTROL OVER THE WAY MY PENSION IS INVESTED WHILST IN THE SCHEME?
Generally no, the scheme trustees make the investment decisions.
CAN I ARRANGE FOR THE VALUE OF MY PENSION TO BE TRANSFERRED FROM THE SCHEME?
This is an option for most “funded schemes”. A cash equivalent transfer value (CETV) is calculated by the scheme Actuaries, which is the amount that could be transferred to a personal pension arrangement where you are in control. The CETV is the value that the scheme Trustees believe, after growth, will be sufficient to provide similar benefits as those provided by the scheme at normal retirement
IF BENEFITS ARE TRANSFERRED FROM THE SCHEME, WHO DECIDES WHAT LEVEL OF INCOME I RECEIVE AND WHEN?
The member has control and decides how much income to take, when and how often. (This is subject to the current minimum age of 55. This may be earlier in exceptional circumstances such as severe ill health)
WHAT HAPPENS IF I DIE FOLLOWING THE TRANSFER OF PENSION BENEFITS FROM THE SCHEME?
After transfer 100% of funds within your personal arrangement can be paid to a person of your choice.
AM I BETTER OFF TRANSFERRING MY PENSION BENEFITS FROM THE SCHEME?
This depends on personal circumstances, many members benefit by remaining in the scheme, other members may be significantly better off by transferring. Please see the following case studies which quantify some examples. It is important to be aware that a transfer is certainly not for everyone. Specialist knowledge, rigorous analysis and professional advice is the only way to clarify what is the optimum solution for each individual.
WHERE CAN I GET ADVICE REGARDING MY PENSION?
The scheme Trustees and the scheme booklet provide scheme details. Generic information (not advice) is available from agencies including: The Pension Regulator, HMRC and The Citizens Advice Bureau.
Firmus Financial Planning have the experience and qualifications to explain options and are authorised to provide individual advice in this complicated area.
In order to quantify the benefits of considering transfers please see the case studies below. These relate to clients who meet the criteria where a transfer optimises the pension benefits held by the individual. Please note that many enquiries regarding transfer result in our recommendation to remain in the scheme. We will not transfer a member from a pension scheme where it is not in the best interests of the member.
Case Study 1
Client aged 56, who has been bankrupt, had a Defined Pension Scheme with a CETV of £450,000. Having ran his own businesses in the past he required funding to set up a new venture as he was finding it difficult finding employment. A transfer to a personal arrangement was facilitated and the client accessed part of his tax free lump sum entitlement to purchase equipment for a new business. While there was an option to take benefits from the scheme at this age, the actuarial reduction applied meant that the pension would have been almost half that available if they remained in the scheme until normal retirement and the lump sum was almost £40,000 less than that from a personal arrangement immediately after transfer.
By transferring he was able to access an amount he wanted now, but leave the remainder invested for the future. If benefits had been taken from the scheme there was no option but to take both the lump sum and income at the same time.
Case Study 2
Client aged 57, who was recently made redundant. He had a Defined Benefit Scheme with a normal retirement age of 65 and a CETV of £280,000. The client was a widower with grown up children, which meant that when he died the scheme pension would die with him. His objective was to release some funds now to live off while he obtained employment, but he also wanted to ensure the fund did not die with him and that either his children or grandchildren would receive something. While the scheme would have paid him a pension, it would have been actuarially reduced, but there would have been no benefits payable upon his death.
By transferring he was able to release part of his fund to provide an income plus the remaining fund was left invested for the future and could also be paid as a lump sum to his nominated beneficiaries in the event of his death.
We hope the above has been useful to give you an insight into the options available. As stated earlier, individual circumstances are fundamental when considering whether to take control of your pension. These include, health, marital status, overall wealth, attitude toward risk, dependants and many more factors. There is absolutely no “one size fits all”. Qualified advice based on a thorough understanding of your circumstances is the only safe way to proceed.
We would be pleased to discuss your situation and explain our process, please call or email……