“I’m looking to transfer approx £34,000 from a local authority deferred pension scheme into my own SIPP (Self-Invested Personal Pension) for which I need a form signing off as it’s over £30,000.
“I am trying to find a financial adviser who will sign a Safeguarding Benefit form from my pension company as I want to transfer two pensions with guaranteed annuities to a drawdown pension.”
We frequently get contacted by people looking for an adviser to merely sign a form to allow them to forgo potentially valuable guarantees their pensions have. Unfortunately, it is not as simple as getting an appropriate adviser to just sign a piece of paper and off they go.
When Pension Freedoms were introduced in April 2015, the tax rules were changed to give people greater access to their pensions. This allowed individuals multiple options in what they could do with their pension funds when they retired. The options available include:
- Leaving the pension pot untouched
- Purchasing an annuity
- Getting a variable income (Flexi-Access Drawdown)
- Taking withdrawals in chunks (Uncrystallised Funds Pension Lump Sum – 25% tax-free cash, 75% taxable)
- Taking tax-free cash proportional as opposed to all in one go, using the taxable part to utilise the Personal Allowance and topping up their income with a smaller tax-free cash element
- Cashing in the whole pot in one go
- Mixing any of the above options
Whilst the Pension Freedoms encouraged everyone to get advice on their retirement options, in some instances it made it law for people to seek advice to alter the structure of theirs. This was specifically where a plan with safeguarded benefits was valued over £30,000.
Safeguarded benefits can be defined as a pension that includes some form of guarantee or promise attached to the scheme during the saving phase of a member’s working life that comes into effect when they retire.
- Under an occupational pension scheme, a promised level of income calculated by reference to the member’s pensionable service in the employment of the pension scheme’s sponsoring employer (for instance, under a Final Salary scheme).
- A promised level of income (or guaranteed minimum level of income) calculated by reference to the contributions or premiums paid by or in respect of the member (for instance, under some older personal pension policies such as a Section 32 Buyout Policy).
- A promised minimum rate at which the member will have the option to convert their accumulated pot or fund into an income at a future point, usually on the member reaching a particular age (generally known as a guaranteed annuity rate, or guaranteed annuity option). These rates can often be a lot higher than those currently available in the market place, buying an equivalent guaranteed income.
This type of work is specialist advice with firms requiring special permissions to carry this out. Increasing scrutiny on the advice given in this area, and concern from the Financial Conduct Authority (FCA) that a large number of consumers are being ill-advised to forgo these guarantees, influences the insurance market. By encouraging claims handlers to promote their services and potentially encourages an increased number of complaints to arise in future, where ordinarily consumers may be quite happy with their outcome. This, alongside the increase in award limit by the Financial Ombudsman in 2019 from £150,000 to £350,000, makes insurers very anxious about the level of awards they may need to make in future.
To combat their anxiety and concern they increase insurance premiums significantly to firms advising in this area, increasing the excess on future claims, which has an impact on capital resources firms must hold, which essentially means holding more capital at the bank that cannot be used. Firms that wish to continue advising in this area must accept the increases, and price their fees according to the risk, or they withdraw their permissions, reducing the number of firms available to consumers where they can obtain advice in this area.
It’s important that consumers understand that it isn’t just as simple as signing a form. When obtaining any financial advice a process needs to be adhered too, and document the following:
- Information about you and your family, and how much income you need to support your family during your retirement
- Information about you and,if relevant, your spouse/partner’s, employment, current income and spending, tax position, entitlement to the State Pension or state benefits
- Information about your health,and partner’s health, if relevant
- Your and your spouse’s other pensions, investments and debts, and any dependency on state benefits,and partner’s details, if relevant
- Your priorities and spending plans for your retirement
- How much risk you feel comfortable with and the extent to which you are prepared to accept a reduced lifestyle in retirement if investments performed poorly
This isn’t exhaustive, and other discussions must be documented to build a file and ensure you are receiving the best advice, and enable the firm also to defend the recommendation should a future complaint arise. Understanding the background to this may help an understanding of the requirements when a pension provider insists a form needs to be signed by an adviser and what it actually entails.
Get in touch
The Pension Planner does not provide advice in relation to certain safeguarded benefits, and would introduce this to a specialist whose focus is on this type of advice. Nonetheless, if you have any questions about how the process works or want further information, please get in touch. Email email@example.com or call 0800 0787 182.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of legislation which is subject to change.