George Osborne started a pensions revolution in late 2014, opening up a wealth of new options and having a profound impact on the way people use their pension savings in retirement. Rules and tax treatment changes to personal pension accounts in retirement came into effect in April 2015, making them considerably more attractive.
These changes simultaneously rang the death knell for annuities. Over the past twenty years, annuity costs have soared as risk-free investment returns have fallen and life expectancy has risen. Annuities are an inflexible and irreversible retirement product that lock in current interest rates and lock out further investment opportunity or access to capital.
Not only are they expensive but they look increasingly outdated for modern retirement, which can extend over 25 years with periods of very different income and capital requirements. Even when rates were more attractive, annuities were never popular primarily because of the implicit gamble they represent. Those who die young do badly and end up subsidising those who live longer. Annuities are ultimately worthless to the next generation.
It is not surprising that within months of the legislative changes being announced, annuity sales collapsed. Swathes of people are using the new rules and using pension drawdowns to access their pension savings in retirement.
According to the HM Revenue & Customes (April 17), a total of £10 billion in pension assets had been withdrawn and the Association of British Insurers stated that annuity purchases have fallen by approximately 62%. The Association estimates that this trend will continue as people begin to more fully understand the options available to them.
The Pension Plannning overview
It is important to note that our approach when reviewing when reviewing pension transfer case involving 'Defined Benefit' schemes (also known as 'Final Salary'schemes) is to to start with the presumption that,in most cases,transferring away from the 'Defined Benefit' scheme is not in the individual's best interest.
To briefly explain the rationale behind our stance,it is important to understand the basic difference between 'Defined Benefit' ('Final Salary' scheme) and 'Defined Contribution'scheme (Money Purchase scheme) and how benefits are funded.
With a 'Defined Benefit'scheme the pension income the indivdual receives at retirement is based on the number of years'service and,in most cases,their 'Final Salary'with the employer.
Typically,this type of scheme providers benefit to the Individual (current or formar employees) based upon lenghth (years,months and days) of service.The main benefit of these types of scheme is that the pension available to the individual at retirement can be pre-determined(subject to various increases due to inflation) irrespective of how the financial markets performing.This is because the pension paid is not dependent on investment growth as it is a promise from the sponsoring employer.
While 'Defined Benefit' schemes can be transferred into another employers 'Defined Benefit' scheme,more commonly in the private sector,transfers from an existing scheme will typically be placed into an alternative arrangemnent-a 'Defined Contribrtion'scheme(also known as Money Purchase schemes).
With 'Defined Contribution'arrangements,the benefit payable at retirement are based on the amount of money paid into the scheme,how well the investments perform and,when the benefits are drawn via 'income withdrawal',whether the pensionand the underlying investments can sustain income for the remainder of your life.As such,the pensionpaid is heavily dependent on investment growth as there is no promise or guarantee to pay a minimum level.
Where an individual is looking to secure income in retirement,the benefits payable will depend on several factors,for example,the fund size along with annuity and interest rates at the date of retiremet.
Alternatively,where a flexible income strategy is required,it will be reliant on fund size at retirement,the level of income required at various life sages and the performance of the investments within agreed risk parameters. These factors mean that the certainty or guarantee availablke with 'Defined Benefit' scheme in regards to pension income is lost once the benefits have been transferred away.
It is important to note that a transfer,once completed,cannot be reversed.
As such,based on the above,we would not reccommed a transfer unless we can demonstrate,taking all relevant factors into consideration,that it is in an individual's best interest to do so.
There is a set timescale for transfers and this runs from the day the transfer is provided,the timescale is 90 days,if the offer is not transfered within this timescale a recalculation is required by the scheme with additional charges payable to the trustees.
*We do work within these timescales however we provide no guarantee that this can be completed within the timscale due to circumstances outwith out control.
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