- When can I claim my pension?
- What should I consider when cashing in my pension?
- What are my options for drawing a DC pension?
- Can I take a tax free lump sum?
- Are pension transfers the next miss-selling scandal?
- What impact will the change in the calculation of the Retail Price Index have on my pension?
- GMPs: What are they and why are they in the news?
When can I claim my pension?
The earliest that a pension can be drawn is minimum pension age. Minimum pension age was increased to age 55 in April 2006.
Workers who were in active service of a pension scheme on 5 April 2006 may have a protected minimum pension age of 50. This means that the earliest benefits could be drawn is from age 50 rather than 55.
The Government has announced its intention to increase minimum pension age in the future. However at present the legislation for future increases has not been brought to Parliament. The expectation is that in future minimum pension age will increase in line with increases to state pension age so that it remains 10 years before state pension age.
What should I consider when cashing in my pension?
In wake of concerns of mass miss-selling of transfers to members of the British Steel Pension Scheme (BSPS) in 2017 there are concerns about the quality of the recommendations to cash in defined benefit pension schemes from indepedent financial advisors (IFAs).
Of course there are many excellent advisers out there who give professional advice that is in their clients’ interests; this inforamtion is to help you spot the exceptions.
How widespread is the problem of bad advice?
In October 2017 the regulator (the Financial Conduct Authority – the FCA) published information that indicated that only 47% of recommendations to take cash transfers from defined benefit pension schemes were clearly suitable.
A significant number of advisers working with BSPS have been told by the FCA, or voluntarily agreed, to stop offering defined benefit transfer advice.
A committee of MPs have weighed in on this issue and are likely to publish a report outlining problems with advice and regulatory failings soon.
Beware advisers bearing gifts!
The MPs’ investigation into BSPS transfer advice descended into farce over an argument about whether scheme members were served chicken or sausages at meetings to introduce them to advisors.
The wider point is that the issues involved with transferring defined benefit pension rights are far too important to be swayed by someone offering chicken in a basket (or sausages).
It is better for you to find them than vice versa!
In general you should be wary of advisors who chase business in customers’ workplaces rather than wait for customers to approach them.
For example there are firms of advisors drumming up pension transfer business by visiting Prospect workplaces where they know there are lots of members with generous defined benefit pension entitlements that might generate fat transfer fees.
The author of this report looked into this type of advice and found, for example, that their materials had “around seven pages explaining the possible perks of transferring out, including high values, flexibility and tax savings. However, a mere four bullet points towards the back of the brochure explain why somebody might choose to stay in their DB scheme.”
What are the advisers’ incentives?
Many advisors charge on a “contingent fee” basis. A contingent fee is where the adviser is only paid, or is paid significantly more, if a transfer goes ahead. The regulator admits that contingent charging poses a risk of creating a conflict of interest for advisors. You may prefer to find an adviser that charges a fixed fee or a fee based on how long it takes to prepare the advice.
How high are the transfer fees?
Whether the fee for advice is a percentage of the transfer value or a fixed fee or based on the time taken to do the work it is obviously important not to be ripped off.
Unbiased.co.uk has information on the fees that are typically charged. Reports of advisers charging BSPS members 3% of the pension pot or more show that it is easy to get ripped off if you do not shop around.
How appropriate is the vehicle funds are transferred to?
It is important to look at the charge associated with the investment vehicle any lump sum is transferred to as well as the charges for the transfer itself.
It is equally important to know how your cash is going to be invested. But even more seriously, the regulator has this warning about frauds and scams.
What are my options for drawing a DC pension?
Traditionally workers used their DC ‘pension pots’ to purchase an annuity from an insurance company at retirement. This is essentially a ‘guaranteed income’ that is payable for the rest of your life.
There are numerous options for annuities. These include the frequency of the payment, if payment is in arrears or advance, how the payment increases during retirement if at all and if there is a spouse’s pension payable if they survive you.
Under Pension Freedoms introduced by George Osbourne during the Coalition Government, restrictions on how members can draw on DC pensions were lifted. Flexi-access drawdown and UFPLS are now popular options.
Flexi-access draw down allows you to draw a regular adjustable income from your ‘pension pot’. This is not guaranteed and may need to reduce to ensure the money is not all spent before your retirement ends.
UFPLS is the technical name for taking cash from your ‘pension pot’ in chunks.
There are also rules for workers with a very small amount of money in a pension scheme.
In practice workers with only DC Pensions will likely draw their pension using more than one of these methods.
Can I take a tax free lump sum?
Yes. You can take up to 25% of the value of your pension benefits as a tax free lump sum, subject to a maximum of 25% of your lifetime allowance.
Your pension scheme provider will be able to provide more information about your tax free lump sum entitlement.
Are pension transfers the next miss-selling scandal?
Personalised financial advice can only be provided by a financial advisor that is authorised and regulated by the Financial Conduct Authority. It is mandatory for scheme members with defined benefit (DB) pensions worth in excess of £30,000 to receive advice when making a transfer.
However there are concerns that there are rogue advisors that are not making the best recommendations for their customers on both the recommendation to transfer and the recommendation on the product to transfer to.
The experience of members of the British Steel Pension Scheme (BSPS), following the deal to save Tata Steel and restructure the pension scheme brought this to national attention. The case of the BSPS was not a typical situation. This was a golden opportunity for rogue advisers with the numbers of members seeking advice at that time outstripping the local capacity of advisers.
Articles in the Guardian and the Telegraph give a taste of the difficulties BSPS members faced dealing with rogue advisors.
However concerns about whether transfers out are in members’ interests and about the process underpinning transfers out persist:
(1) Critical report by MPs
In February 2018 MPs on the Commons Work and Pensions Select Committee called for urgent action because “another major miss-selling scandal is already erupting on defined benefit pension transfers”.
(2) Regulatory development
In January 2017, the Financial Conduct Authority issued an alert on advising on pension transfers because they were concerned that scheme members were at risk of transferring into unsuitable investments or even being scammed.
In March 2018 the Financial Conduct Authority announced that, in light of concerns about the significant proportion of unsuitable advice, they would still require advisors to “start from the assumption that a DB pension transfer will be unsuitable”.
In June 2020 the Financial Conduct Authority announced that it would ban contingent charging (where fees are only paid if transfers go ahead) in most circumstances from the 1st October 2020. In their consultation guidance they highlighted concern at the high levels of recommendations to transfer and unsuitable advice being provided to consumers.
These developments do not directly impact on the choices facing any individual. However, the concerns expressed by MPs, the regulator and others will hopefully emphasise the importance of a decision to cash in defined benefit pensions and the need to consider the issues very carefully.
What impact will the change in the calculation of the Retail Price Index have on my pension?
The announced reform of Retail Price Index (RPI) from 2030 will have two main effects for members of pension schemes. The first is on the level of benefits you receive and the second is on the funding position of trust based defined benefit (DB) pension schemes.
Indexation in retirement
Defined benefits and annuities often have indexation based upon RPI. For some members all or some of their defined benefit pensions will be linked to RPI. For members with pensions linked to RPI that are paid after 2030, this will mean that over time their pension will increase by a smaller amount. The table below shoes that CPIH has been between 0.6% and 1% less than RPI in recent years. Public sector pension schemes have already switched from RPI to the consumer price index (CPI) for increases in retirement.
| Year | RPI | CPIH |
|---|---|---|
| 2016-17 | 1.6% | 0.8% |
| 2017-18 | 3.1% | 2.3% |
| 2018-19 | 3.3% | 2.3% |
| 2019-20 | 2.4% | 1.8% |
DB Scheme Funding Levels
The second is more complex, and may not directly effect members. Trust based defined benefit pension schemes are funded in advance and have a range of investments. The funding level is determined by the amount of their liabilities and the assets they hold.
UK defined benefit pension schemes hold a substantial amount of UK gilts and will see a negative impact on their investments from this change. Whilst schemes with benefits linked to RPI may see a positive impact from a funding position in their liabilities, the net affect of this change is expected to be negative for schemes.
Whilst a sponsoring employer is able to financially support any deficits in the scheme the funding position of the scheme will not impact members pensions. However, if the sponsoring employer becomes insolvent and a deficit in the funding level exists, members may not receive the level of pension they were expecting.
In the worst case scenario members will receive compensation from the Pension Protection Fund that can be 90% of the value of their accrued pension, with limited indexation in retirement.
Why is this happening?
The criticism of the mythology of the calculation of the Retail Price Index (RPI) led to the removal of it’s designation as a national statistic by the Office for National Statistic in 2013.
The removal of this designation has not impacted it’s continued use by pension schemes, government and consumer companies as measure for inflation. Whilst the Government has already switched to the Consumer Price Index (CPI) for price inflation for increases to public sector and state pensions and government benefits, it has continued to use RPI for increases to train fares and government index linked gilts.
In March 2020 the Government and the UK Statistics Authority published a joint consultation on the future of RPI. They proposed replacing the methodology for the calculation of RPI with CPIH. The CPIH measure is similar to CPI with an amendment to including housing costs. Feedback was sought on whether this change should happen in 2025 or 2030 and how this should be implemented.
Prospect responded to this important consultation on behalf of our members arguing that the calculation of RPI should be fixed and not replaced with CPIH branded as RPI. The unions response concludes that the UKSA wish to impose the CPIH, a measure the statistical establishment seems to favour but which has little public credibility or confidence. The response highlights that CPIH falls short of the ONS’s own plans to develop a household measure of inflation, the adoption of it under the label of the RPI will fail those users requiring a household measure of inflation. You can read our full response here.
GMPs: What are they and why are they in the news?
Guaranteed minimum pension (GMP) are a legacy of ‘contracting-out’ for members who were enrolled into defined benefit pension schemes between 6 April 1978 and 5 April 1997.
GMPs were a feature of the state earnings related pension (SERPS) that the Government introduced on 1978. Employers with defined benefit pension schemes were able to ‘contract-out’ their staff from SERPS, with both the employer and employee paying lower national insurance contributions. In exchange their defined benefit pension scheme was required to build up a GMP entitlement for members.
On the 5 April 1997 SERPS was reformed and renamed State Second Pension (S2P), whilst contacting out continued, GMPs ended at this date. Whilst ‘contacting-out’ was ended in April 2016 with the introduction of the New State Pension.
The importance of a GMP and pensions increase is that occupational pension schemes do not provide increases on the pre-88 GMP and only increase the post-88 GMP to a maximum of 3%. Prior to the introduction of the single tier state pension in 2016, the state pension would provide the increase for the pre-88 GMP as well as the excess over 3% on the post-88 GMP. The introduction of the New State Pension came with the decision to not provide increases on GMP’s that schemes do not provide.
Reconciliation and rectification
Following the end of contracting-out a program of GMP rectification began between HMRC and pension schemes to reconcile and rectification members recorded GMP amounts.
This can lead to members receiving notification of an overpayment of underpayment of their pension that has occurred as a result of their pension in retirement not increasing by the amount it should have.
If you’ve experienced this and have been overpaid pension read How should I respond to a request for repayment of overpaid pension? in the Pension Disputes section.
Equalisation
Equalisation of GMPs is an issue that has been known about since 1990 when the Barber judgement ruled that pensions are deferred pay and should not have an unequal pension age based upon gender. GMPs reflect state pension entitlement that for some members is based upon a state pension age that was different because of their gender.
The equalisation of GMPs has been in the news as a result of court cases to clarify what action needs to be taken by trustees. The recent legal action has provided clarity for trustees and we expect that once pension schemes have completed their reconciliation and rectification of GMPs, equalisation will be implemented in due course.
This equalisation could result in members receiving a slightly higher level of pension than they may have otherwise received.
Public sector pensions
The Government is consulting on the future indexation of guaranteed minimum pensions (GMPs) for those reaching state pension age after 6 April 2021. The government has been uprating GMPs for members of public sector pension schemes as an interim solution between 6 April 2016 and 5 April 2021.
The Government is consulting on the extension of full indexation only up to 5 April 2024, for a limited period after 5 April 2024 or indefinitely.
Prospect will be responding to the consultation on behalf of our members in public services sector before the consultation closes on the 30th December.
Our response will highlight our support for continued uprating of GMPs in all public sector pension schemes. As well as being mindful of the interests of our members in Section B of the BT pension scheme which has provisions for GMPs that make reference to the policy taken by the civil service pension scheme.
Get support as a member
Speak with your representatives:
If you work in an organisation that has local Bectu representatives, you should speak to them about any work-related issues.
Call the member contact centre on 0300 600 1878 or email [email protected]