Analysis: In the 1998 film Armageddon, while battling G-force in a shuttle around the moon, hero AJ Frost asks: “Is this supposed to be like this?”
“Don’t worry,” replies sidekick Oscar Choi. “This is normal.”
'Deliberate deprivation'
How long are you going to live? The odds are that none of us will get the answer to that exactly right – but could we be penalised for getting it wrong and outliving our pension savings?
Possibly so, according to the government. If you spend, transfer or give away your pension savings then a judgment will be made about whether you have deliberately deprived yourself of the money – if so, then this might count against you when assessing a future claim for benefits.
In principle it’s fair enough that “you are expected to use your pension(s) to help support yourself” – although it’s perhaps a little further from freedom, choice and Lamborghini-buying than soundbites suggest.
If you spread the average pot of around £25,000 over 25 years of retirement, you might decide to live on the state pension and use that extra money for luxuries, to pay some of your mortgage off or to help your grandchildren pay off student loans. But what happens if you live for 30 or 40 years, or if health issues unexpectedly increase your outgoings?
The problem is that it’s not very clear what ‘deliberate deprivation’ is. There’s no specific limit to the look-back period in the deprivation of capital rules, so members need to understand they may only have a certain amount of freedom and choice – ie if they ever need to claim benefits their spending decisions will be open to investigation.
The ‘second line of defence’ rules already include warnings that accessing DC cash may affect your entitlement to benefits – but that refers to current entitlements, not future claims or how you spend the money.
Trustees should not go beyond the generic risk warnings to avoid giving specific advice, but it seems unlikely Pension Wise or other guidance providers and advisers will be able to explain exactly what the parameters are without clearer guidance on this issue.
The housing benefit guidance manual suggests that if you have a choice, then choosing to spend the money might indicate intention. A case officer will draw their own conclusions based on the circumstances of the case.
In addition, judgments about what expenditure is reasonable will be made on a case-by-case basis. When is a past holiday too expensive, or a lifestyle too extravagant? The degree of subjectivity involved, and the lack of transparency, will make outcomes difficult to predict.
By way of contrast, if I access my pension cash and invest it in what turns out to be a scam, that presumably wouldn’t count against me if I later applied for benefits – my intention was to increase my income, not to dispose of my capital.
But if I choose to help out my family financially, or to donate to charity, then that might affect any claim I later make.
Savings that might have yielded a marginal annuity income could, under flexible access, represent substantial accessible capital.
This is an area where clarity, transparency and stability in the rules are vital to protect the interests of the future elderly.
Helen Powell is counsel at Allen & Overy
In recent months many across the pensions industry may have struggled to see beyond April 6 as they rallied in preparation for the new world of flexibility.
But while this new normal hits home, industry experts say several risks remain.
Uninformed decisions
Mike Spink, defined contribution pension consultant at Spence & Partners, says the biggest ongoing risk is that members make uninformed decisions without seeking any advice or guidance.
“The biggest risk is people taking decisions in isolation,” says Spink. “People haven’t yet heard about the help that is out there.”
Lacking awareness of the wider guidance available, members may plough on with decisions, oblivious to the tax treatment on accessing pensions, the impact on means-tested benefits, the pros and cons of taking a transfer value and the ever-growing threat of pension scams.
Employers, trustees and providers will also have to redouble their efforts to spread the word about the government’s Pension Wise service in the run-up to the general election, as during this period it is forbidden for public money to be spent on promoting initiatives deemed to be linked to a particular political party.
As a result, all publicity around Pension Wise has been scaled back until after the election.
Rob Booth, head of proposition at provider Now Pensions, says this means there is a big danger of members feeling lost over the coming weeks.
“We need to encourage people to use Pension Wise, I think it will improve over time,” he says.
Employer awareness
Many members feeling confused about their choices may turn to employers as their first port of call.
However, recent figures demonstrate low levels of awareness among employers and a lack of contact from providers.
More than half (56 per cent) of 400 small and medium-sized employers surveyed by Now Pensions say they have never heard of the pension reforms or the Pension Wise guidance service.
And according to consultancy PwC’s recent pension reforms survey, fewer than four in 10 (36 per cent) of 1,200 people aged 50-75 have been contacted by their pension provider about the retirement options available to them.
When communicating with members over the coming months, Booth says it will be important for employers, trustees and providers to strike a balance between education and simplicity.
“The first message should be ‘Don’t rush into a decision’. There is the option of doing nothing,” he says.
Tax bills
Members rushing to get their hands on pensions as cash or through drawdown could be hit with hefty tax bills and could push some into a higher tax band.
Many will not be expecting such large tax deductions and may be shocked to discover they will lose a significant proportion of their pension savings.
Robert West, head of pensions at law firm Baker & McKenzie, says many employers and trustees are apprehensive about being seen to give employees advice or guidance on tax matters.
“No employer will want to get into the position of giving tax advice,” says West. “Any commentary on tax will have to be generic and general, a tip-off to members that they will face some tax treatments.”
West says employers should point members in the direction of Pension Wise and independent financial advisers, but sees trouble ahead for those charged with guiding members.
“The word mis-selling [is] in the air – members look for scapegoats,” he says. “It’s created a climate of extreme uncertainty as to how far [you] should go in assisting members.”
Transfer risk
Members of private sector defined benefit schemes now have the option to transfer their benefits into a DC arrangement to access the flexibilities.
John Broome Saunders, actuarial director at consultancy Broadstone, says better communication around this option is needed, and any anxiety trustees may have around communicating this to members is misplaced.
Saunders says: “You can set out the options in a way that doesn’t encourage people one way or another… if delivered in a factual way.”
There’s a question about where you get that advice from; a lot of financial planners and advisers are avoiding working in the area. It’s been fraught with danger in the past
Premier Pensions Management
John Reeve, senior consultant at Premier Pensions Management, foresees capacity issues as the demand among DB members for independent financial advice increases.
“There are not that many IFAs around… able to provide the detailed analysis they will need to make an assessment,” he says.
Reeve thinks that once members realise the size of their transfer value they might be much more willing to pay for advice.
“There’s a question about where you get that advice from; a lot of financial planners and advisers are avoiding working in the area. It’s been fraught with danger in the past,” he says.
Beware the scammers
The dangers of the past are evolving into the dangers of the future as pension scammers devise new ways of liberating unsuspecting members’ pension pots with the promise of too-good-to-be-true investment returns.
The Pensions Regulator’s Scorpion campaign was boosted last month with a new code from the sector-wide Pensions Liberation Industry Group.
The code is structured around three key principles to help protect members from the rise of increasingly sophisticated scamming models: raising awareness, robust processes and knowledge of perpetrators’ strategies.
Baker & McKenzie’s West says that while there will be a persistent group who demand a transfer to dubious arrangements in the face of warning signs, for receptive members the important messages will get through.
“It’s frankly difficult to get any more messages out there,” says West.
Let’s hope members take the time to digest this new environment before hastily making any life-changing decisions.
