Pensions window of opportunity for high earners

The pension scene is changing so rapidly that it is very difficult to keep pace with what is happening or what we should all be doing.  The latest reforms affect high earners who are members of final salary linked occupational pension schemes.  If you come into this category and want to take control of your pension under the new rules then you have a year in which to switch out of your company scheme into a Self Invested Personal Pension. 

The government announced last month that it would no longer be necessary to purchase an annuity by age 75 with your accumulated pension pot.  It will still be necessary to purchase a minimum pension to prevent the individual from becoming a burden on the State which will probably cost around £50,000 of accumulated pension savings.  But once you have done this, you can do more or less what you like with the balance - an attractive proposition for someone with £1 million or more in their pension fund.  To take advantage of this opportunity, high earners who are members of a final salary linked pension scheme will have to transfer to a personal pension or Self Invested Personal Pension.

But the Department for Work and Pensions is proposing to prevent transfers from final salary schemes into defined contribution schemes like personal pensions or Sipps from 2012. If you cannot transfer, you will not be able to take advantage of the relaxation of the rules on annuitisation.  In other words, you will not be able to get your hands on the surplus cash.

Axa Wealth’s head of pensions development, Mike Morrison, has put his finger on the problem.  He points out that although wealthier pension savers will be free to do what they like with their pension surplus, once they have purchased the minimum pension, ‘it is unlikely that existing occupational schemes will amend their rules to accommodate the changes.’ 

He is predicting that where an employee has a pension pot large enough to provide the minimum pension and still leave a substantial excess, many of these employees will want to opt out of the occupational scheme and transfer to a SIPP or personal pension in order to take advantage of the relaxation of the annuitisation rules.

‘If the new regulations on removing compulsion at age 75 are implemented in 2011 and the DWP rules change as anticipated then we have one year to get all the senior people out of contracted out DB schemes,’ warns Morrison.  He queries whether this is what the government intends. 

Of course, some employees in good final salary schemes might not want to switch to a personal pension, even if it gave them flexibility and greater control of their pension pot.  But others will – particularly the very wealthy.  Even relatively modest earners might want to move their pension fund if they fear their employer may go bust leaving the pension fund in deficit. The maximum pension paid out by the Pension Protection Fund is £33,000 a year so those with pension entitlement in excess of this figure and a fragile employer will probably want to opt out.

Pensions expert Laith Khalaf of Hargreaves Lansdown believes that the government knows what it is doing and is aware of what Morrison calls the ‘unintended consequences’ of the DWP proposals.  ‘The DWP appears to have gone through the statute book crossing out the words ‘contracted out DC scheme.’ One of the bits they have crossed out is the bit that permits final salary transfers to these schemes. It may be re-instated once they realise the consequences - but actually I got the impression they already knew what they were doing,’ says Khalaf. 

He confirms Morrison’s view that many high earners in occupational pension schemes will not be able to take advantage of the relaxation of the annuitisation rules as things currently stand.  ‘If they ban transfers from final salary schemes (from 2012) to defined contribution schemes, final salary members will not be able to transfer their pension into a DC scheme to take advantage of these provisions,’ he warns. 

If the experts are right, high earners have no time to lose if they want to switch out of their company scheme to take advantage of the relaxation of the annuitisation rules and exercise control over their pension savings.