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Fewer retirees forced to take advice on pension access
The government has relaxed the rules around financial advice for retirees accessing their pensions.
by Michelle McGagh on Mar 09, 2016 at 08:00
Fewer retirees will be forced to take advice when accessing their pensions after the government relaxed the rules around guaranteed annuity rates.
Annuities may have fallen out of favour following the introduction of pension freedoms but guaranteed annuity rates (GARs) are a very valuable benefit attached to older pension contracts.
GARs were put in place decades ago when gilt yields – which are used to calculate annuity rates – were very high, meaning the amount of income (or the annuity) provided by a GAR was far higher than annuity rates retirees can get today.
In order to ensure retirees didn’t throw away these perks in the dash for their pension cash, the government stipulated that people with a GAR of £30,000 had to take advice before they could get their cash.
But that rule ran into problems. Retirees saw it as an unfair barrier to their pension cash, while the value was attributed to the ‘safeguarded benefits’, not the total pension pot. This meant that more people whose pension pot was below £30,000 were being caught by the advice rule as feasibly the GAR could mean they received more than £30,000 over their lifetime.
Now, the government has confirmed that the £30,000 figure applies to the total value of the pension, not the value of the GAR.
That means if you have over £30,000 saved into your pension and it offers you a GAR, then you still have to take advice but fewer people will get caught in the advice net.
In a statement from the Department for Work and Pensions, it said the Pension Schemes Act 2015 would be amended to ensure pension providers looked at the value of the pension rather than the value of the GAR.
‘Providers should treat the value of safeguarded benefits, including those with a GAR, as equal to the actual transfer payment to which the member would have a statutory right in respect of those benefits,’ it said.
‘The amended valuation approach will apply to both personal and occupational pension schemes, in respect of all types of safeguarded benefits.’
Fiona Tait, a pension expert at Royal London, said the changes made it easier to understand the rule and that using the value of the pension pot was a sensible solution.
‘I think it’s the right decision for two reasons,’ she said. ‘The value of the pension is something people will understand, they have a fund worth X and it is either above £30,000 or it’s not. And the other reason is it is very difficult to tread the line between giving [consumers] protection and taking away their choice. We feel, on balance, that we would rather the statutory requirement to take advice was at the higher level.’
However, Tait said strong risk warnings would also need to be given to people giving up their GAR as ‘the GAR may be worth up to twice the fund value’. In other words if the pension is worth £30,000 then you could receive £60,000 from the annuity income if you live long enough.
Giving up a valuable benefit is not to be taken lightly, but those who do want to take the GAR should also make sure they check the small print in their pension contract as even though the benefits are valuable, there are downsides.
‘The downsides are a lot of GARs kick in at a certain age,’ said Tait. ‘People will have to wait, usually to 65 and sometimes to 70 [before they can take their annuity income].
‘They are very valuable but to a 55-year-old who wants to be able to pay off their credit card it might be better to have [the money from their pension] now than wait 15 years.’
If you access the pension too soon you may lose your GAR and also if you access it too late as some have an expiry.
‘Some [of the pension contracts] are very careful about the wording so you need to retire on the date you set out – say your 65th birthday. People need to check that out and check the conditions for their GAR.’
The types of annuities offered under guarantees can also be restrictive, with Tait stating that most are single-life annuities, meaning your spouse or partner would not be able to receive the income should you die.
Although people no longer have to take advice if their pension is worth less than £30,000, Tait said it was worth doing.
‘We do not want people to give up their benefit and regret it later but if the benefits are not relevant to them it may be better to access their pension now,’ she said.
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