Wealth Management: Pensions update
In the second blog in our Wealth Management series, Moore and Smalley’s Dave Gleeson gives an update on pensions.
Major recent developments have made it more crucial than ever for individuals to understand the significance of their pension investments.
Failure to get to grips with the new pensions environment can mean disappointment, frustration and financial loss at a time of life when you should be able to kick back and relax.
Alternatives are more popular, but carry greater risk
Depressed interest rates and gilt yields mean the rate at which pension funds can be converted into a guaranteed income – the annuity rate – is at an all-time low.
As a result, more and more people are spurning traditional annuity purchases for alternative methods such as income drawdown and investment linked annuities.
Although these options represent greater flexibility, they also involve much greater investment risk, and should not be entered into without taking professional advice.
The importance of understanding your pension investments
Equally importantly, many occupational pension schemes have switched from giving a guaranteed pension (commonly known as ‘final salary’ or ‘defined benefit’) to a system that depends on investment returns (often referred to ‘money purchase’ or ‘defined contribution’).
This often involves the pension scheme member having to select the funds in which they invest, frequently with little or no guidance. Again, seeking specialist advice is recommended.
Staying alert to the dangers of ‘pension liberation’ scams
Another significant pensions issue is the upsurge of scams known as ‘pension liberation schemes’, which has prompted the Pensions Regulator to launch a high-profile public awareness campaign. The initiative is in response to figures showing that monies transferred through this type of arrangement have doubled from £200m in 2011 to £400m last year.
Pension liberation is the transfer of a scheme member’s pension savings to an arrangement that gives them access to their funds before the age of 55 – which is only legally possible in specified circumstances, such as serious ill health.
Pension liberation schemes – also known as ‘pension scams’ – entice people through emails, text messages, cold calling or website promotions to transfer their pension. The campaign sets out five steps on how to avoid becoming a victim:
– Never give financial information to a cold caller
– Check the company offering the service is registered with the FSA
– Ask for a statement showing how your pension will be paid at retirement and question who will look after your money until then
– Seek objective professional advice
– Never be rushed into agreeing to a pension transfer