Since the start of the new financial year, the new pension ‘freedoms’ have come into effect and we have a clear guide to all the ‘major changes’ that I will be happy to send to you if you contact me.
I emphasise ‘major changes’ because there is a lot of additional information, not in the guide, that may be relevant to clients with different amounts and types of pension provision as they seek to benefit from the valuable new rules. And not all of it is that straightforward or easy to assess.
For example, although these changes have arrived in law, they haven’t yet been put into practice with all pension providers – some will choose not provide the full suite of options that are now possible and others are still in transition between the old rules and the new ones.
There are also new types of investments that are now eligible for your pension such as peer-2-peer (p2p) funds – I have blogged about p2p here and here. And fund management groups are falling over themselves to emphasise ways of managing the risk of different types of assets in your pension. And, while these might look attractive, I have strong reservations about some of them.
There are also some questions about different types of cost. We still don’t know how the charges for the new flexibility in withdrawing money from your pension will be levied in all instances. Or the extent to which the price and design of annuities will be affected as fewer choose this route for income from their pension.
There are also some important legal issues relating to the new rules and trust law and how that may be affected by current lawsuits relating to divorce and bankruptcy.
And then there are the acronyms!
The pension industry loves an acronym, whether they relate to funds going into a pension, funds coming out or just general regulation. The industry seems to follow a mantra of ‘Always Value Ideas for New And Laudable Acronyms to Use Generously and Habitually’ – or as I prefer to call it ‘’AVIN’ A LAUGH’.
I’ve just had a brief look at the growing database that I maintain to monitor all things pension related, from press articles and conference notes to announcements by HMRC and other relevant bodies – and there are well over 50 different acronyms…so far. Nor are any of them especially memorable, unlike the new think-tank set up by the governments of Pakistan and China known as ‘Research and Development International’ or RANDI for short.
So, while it is true that for many people with straightforward situations that generic guidance will be sufficient, others will benefit greatly from a full appraisal of their pension provision. And tailored advice can ensure that basic mistakes are avoided and that full advantage is taken of the new rules.
This list is definitely not intended to be exhaustive, but here are a few examples of circumstances where good bespoke advice can make a real difference.
- The most obvious question that is fundamental to all the others is, ‘when can I afford to retire?’ The answer to this depends on each clients capacity for risk, appropriate investments and creating a plan using methods that I can readily explain to you.
- Which investments are the most suitable? There are new investment products that are based on matching your risk profile, but great care needs to be taken here. Where investment funds measure risk solely by targeting how volatile an asset is, I have concerns that the funds themselves have little understanding of the important limitations of that approach. A conversation I had with a salesman at a leading fund recently, confirmed that can be the case.
- Is inheritance important? The new rules have reduced the cost of passing on your pension pot, if you have a defined contribution scheme. There are also ‘family SIPPs’, which offer greater flexibility in growing funds within the scheme, but also how they are allocated between members.
- Do you have more than one pension scheme, including a final salary scheme? The way in which final salary and defined contribution schemes interact is very important. Care needs to be taken when making and maintaining contributions between the two and working out the lifetime allowance, which restricts the tax free size of your combined funds.
- Are you thinking of transferring from a guaranteed salary pension to a private plan to access the new freedoms? Leading company pension schemes have seen a dramatic rise in requests for ‘transfer values’ of final salary pension pots. Given the generational lows in interest rates these values can look extremely enticing and have risen recently as trustees of those company schemes seek to manage the rising cost of provision. As yet, these requests haven’t translated into significant switching into private schemes, but I cannot emphasis enough how much care needs to be taken here before such a transfer is made so that the monetary value of what is being foregone is completely understood – particularly if the company scheme is very well funded. In any event, transfers over £30k must be accompanied by independent financial advice. Some company plans will let you ignore that advice if it’s against switching, others won’t. There are specific scenarios where a switch may be justifiable, but only after very careful consideration. I can’t cover everything here, so the best option is to call is you have any concerns.
- ‘Pension Theft’ is unfortunately a reality. If you are cold-called by unknown companies or advisers offering you something that seems too good to be true, then it probably is – all qualified advisers are listed in the FCA Register;
- Past performance is no guide or guarantee of future returns;
- Investment risks apply to all kinds of pensions. Values can rise and fall over time, so it is quite possible to get back less than what you put in, depending upon timing
- This blog does not constitute financial advice and is provided for general information purposes only.