MSE News: 'Second line of defence' for pension savers to be introduced

jamesd

dunstonh wrote: »

Option 2 is not available until next tax year. So, you cannot apply it to past years sales.

At 100k I agree, though that's not what I'd call a small pot. It's part of why I chose 10k but in any case I'd consider the time of sale before thinking it's a mis-sale. The context here though is what the FCA should be telling annuity vendors to do starting on 6 April 2016 and how sales made from that date will be viewed, not historic ones.

dunstonh wrote: »

Why not buy a level annuity? Breakeven on an indexed one is typically around 23 years.p

Because deferring the state pension buys you more income than a level annuity. In my example the level annuity paid £547.70 but even post flat rate SP would pay £580 for the same expenditure.

So you have a choice: use some of the capital to replace the foregone state pension income while deferring or spend the same amount on an annuity or higher value annuity. In each case, deferring buys you more income for your money spend than the annuity.

I used assorted approximations and assumptions but those don't affect the result - the state pension wins unless we turn to considering enhanced annuities or have various income tax niches that are not relevant to the low pension savings case we're considering.

You spend one year's worth of your pension capital to match the state pension income level during a year of deferral. That spending is the amount available to purchase an annuity so you have a pretty much straight choice about how you spend that money: state pension deferring or annuity purchase.

dunstonh wrote: »

Peoples spending tends to go down as they get older and the state pension will be indexed in payment so at least a good chunk (or the majority) of their income will be increased.

I agree. The first is one reason why those with larger incomes might not want to do it, they might favour preserving money for inheritance. The second is part of why deferring is a good deal: it pays more income with inflation linking than a level annuity does without.

dunstonh wrote: »

Other issue is that you are effectively asking the person to give up their 25% lump sum to replace income and people with smaller funds tend to have smaller savings and this may be their last chance to have some capital behind them

I assumed it had already been taken because that's usually a good idea.

dunstonh wrote: »

I get the principle and for larger funds there is merit there. However,most pots are much smaller than £100k. Looking back at my list over the years, the majority were under £50k. It doesnt work with the average sized pension.

It works better with average sized pensions. Less chance of differential income tax rates based on income that can complicate things and make deferring less good, though the annuity would have similar issues anyway.

You're not convinced and I used a 10k post-PCLS pot example. Best thing for you to do is to try a few examples at say 10k, 20k, 30k, 40k and with typical sorts of state pension levels to see what happens. I've already done it in enough income level cases to know it works for the lower levels that could be considered small pots.

bmm78

I think it's really important that the Pension Wise service clearly explains the potential advantages of State Pension deferral. The Pension Wise website has yet to be launched, but the fact that the Money Advice Service have a key role in it isn't a positive sign. Their existing site simply states that the State Pension can be deferred. Focusing on the en vogue "framing" theme, it's important that this information is presented in such a way that people can work out the potential advantages for a given situation, rather than just say "you can defer it and get this".

With the Second Line of Defence the FCA have an opportunity to build consideration of deferral into the sales processes of regulated firms. They need to be clear on what firms are expected to do (both advised and non-advised). There's a time and a place for broad principle-based regulation, but I think with the pension reforms they need to be prescriptive and specific about what things should look like. They can't repeat the same mistakes of the past where self-regulation and lightweight rules have contributed to a dysfunctional market.

Finally, regulated firms should look to embrace the opportunities of state pension deferral, rather than looking at it as something that takes away annuity business. It's not just about compliance, a lot can be done commercially both in terms of product innovation and facilitation.

gadgetmind

Pincher wrote: »

Buying shares so you are investing is too risky.

So, moving funds from a balanced portfolio inside a pension wrapper, into balanced portfolios held in ISAs and/or unwrapped, somehow increases risk?

To my mind, you're just moving the money (in a tax efficient way) from a taxed environment into an environment where the income is (usually) untaxed.

Let us say I have £100k in a pension pot. I transfer it to Pro Life. Pro Life invests it, and obviously the return goes up and down, but Pro Life smoothes it out

Why not just buy a basket of income investment trusts within the pension, and outside of it with the PCLS?

Triumph13

bmm78 wrote: »

Finally, regulated firms should look to embrace the opportunities of state pension deferral, rather than looking at it as something that takes away annuity business. It's not just about compliance, a lot can be done commercially both in terms of product innovation and facilitation.

I couldn't agree more. Try this for a business proposition:


"We will help you use state pension deferral to give you a 4.5% indexed annuity. We pay you the combined pension for the first 3 years, increasing by 2.5% pa. We then give you the letter to send to start claiming your state pension and the state pays you the combined figure from then on." That blows any non-enhanced annuity out of the water in terms of value, is incredibly simple for the customer and very easy to administer for the supplier. If you run the numbers the supplier makes a 6.6% margin on the deal, plus anything they can earn on the cash whilst they hold it.

Pincher

gadgetmind wrote: »

To my mind, you're just moving the money (in a tax efficient way) from a taxed environment into an environment where the income is (usually) untaxed.

If the existing pension fund, on which set up fee was paid years ago, is draw down friendly, I wouldn't want to move at all. The pension funds are all moaning about how their schemes are not flexible enough, so I am assuming a transfer will be necessary, even if it's just in-house.

gadgetmind wrote: »

Why not just buy a basket of income investment trusts within the pension, and outside of it with the PCLS?

It can lose value.

gadgetmind wrote: »

So, moving funds from a balanced portfolio inside a pension wrapper, into balanced portfolios held in ISAs and/or unwrapped, somehow increases risk?

The With Profits aspect is supposed to preserve capital, as you cannot lose any money. In the sense that the UK state pension will not go Greek, annuity providers will not collapse, and a With Profits fund cannot take money away, only add to it. "smoothing"?




Conventional wisdom has it that you want high risk high return during your younger days, and move into low risk low return mode on approach to retirement. Once you are retired, capital preservation is top priority. Annuity means that you lose the capital, so With profits is a good half way house.

gadgetmind

Pincher wrote: »

If the existing pension fund, on which set up fee was paid years ago, is draw down friendly, I wouldn't want to move at all.

Reasons why I would -
1) I want to gut the pension as much as possible before state pension cuts in. I might as well use our personal allowances and my 20% bracket as much as I can before SP uses most of my allowance.
2) Any growth inside the pension leaves more money to come out via tax. If I instead get it out early, I can use ISAs and CGT and dividend allowances (latter in wife's name) to get tax free growth and income.

Basically, I plan to drawdown the max that's tax efficient from SIPPs, keep doing full S&S ISAs each year, and use unwrapped holdings as an income generating buffer that's sold down each year to fund gap between SIPP drawdown and needs (and also to keep funding ISAs).

Linton

Triumph13 wrote: »

I couldn't agree more. Try this for a business proposition:


"We will help you use state pension deferral to give you a 4.5% indexed annuity. We pay you the combined pension for the first 3 years, increasing by 2.5% pa. We then give you the letter to send to start claiming your state pension and the state pays you the combined figure from then on." That blows any non-enhanced annuity out of the water in terms of value, is incredibly simple for the customer and very easy to administer for the supplier. If you run the numbers the supplier makes a 6.6% margin on the deal, plus anything they can earn on the cash whilst they hold it.

Sounds interesting as it could be used remove two of the disadvantages of deferring SP compared with taking an annuity - loss of spouse benefits and guarantee period.

Pincher

bmm78 wrote: »

I think it's really important that the Pension Wise service clearly explains the potential advantages of State Pension deferral.

If people took up your advice en masse, the long term state pension burden will increase. In extremis, it's another Equitable Life 13% annuity fiasco. Equitable Life didn't collapse because they couldn't pay the 13% annuity in 2000, it's the cumulative liability of the future payments that brought it down.


The obvious coping strategy would be to stop inflation adjusting the state pension. The other is to legalise euthanasia, with a free cremation thrown in.

Triumph13

Pincher wrote: »

If people took up your advice en masse, the long term state pension burden will increase. In extremis, it's another Equitable Life 13% annuity fiasco. Equitable Life didn't collapse because they couldn't pay the 13% annuity in 2000, it's the cumulative liability of the future payments that brought it down.


The obvious coping strategy would be to stop inflation adjusting the state pension. The other is to legalise euthanasia, with a free cremation thrown in.

Not if the 5.8% deferral rate has been calculated actuarially. If they've worked it out properly it should be cost neutral - we pay a larger amount for a smaller period - and we get the added cashflow bonus of having delayed payment on everyone, allowing us to pay down a bit of the National Debt and avoid interest payments

Triumph13

Linton wrote: »

Sounds interesting as it could be used remove two of the disadvantages of deferring SP compared with taking an annuity - loss of spouse benefits and guarantee period.

It would be interesting to know what the price of a standalone spouse benefit package would be - a 50% annuity that only kicks in if you predecease your spouse. Assuming equal ages I presume this would be reasonably cheap as on average half the time it never pays out and when it does it generally doesn't start for the thick end of two decades and the recipient is in their eighties.
If you offered a 5 year deferral package on someone with an £8k state pension at a 3.5% equivalent annuity rate you'd charge £66k for the £2,320 'annuity' ie £10,320 a year total. Paying out the cash for the guaranteed 5 years with 2.5% increases costs £54k leaving £12k to buy the spouse benefit plus a nice margin for the provider.
Anyone know how I start a pension company?