Guaranteed Minimum Pension, GAR/safeguarded benefits - bit of a con?

Tommohawk

Hi all - interested to  hear your views.

Short version of this is I have a pension with 3 components: post April 1988 GMP (3% increase), a section 92b element, and an unprotected element.
Because the value is >30k, I cant walk away without taking IFA advice because of the safeguarded benefit.

Just considering the GMP element, this part of the pot is about £60k, and I'm being offered ~£1500pa with 5 year guarantee, 50% to spouse on my death.

If I plug the pot value into one of the annuity quote engines like for like, I get a similar (slightly better rate) from a number of providers.

So, what they are guaranteeing what is actually an inferior rate. How can this possibly be construed as a benefit? They have you over a barrel with their quotation because going via an IFA would cos x thousand pounds, and they know it. 

BTW this is via Reassure previously LG and that in itself is another epic. I got asked if I suffered from high blood pressure..... not until now is the only honest answer.

xylophone

You have a S32 policy following a buy out of a  contracted out DB pension?

On transfer the pension included a post 6/4/88 GMP,   S9 (2B) rights arising from the  "reference scheme test" which applied to Contracted Out Salary Related Schemes up to 6/4/16 and an excess over those amounts?

Why are you considering only the GMP element?  And ignoring the inflation linking?

There must be some form of  inflation linking for the S9 (2B) rights?

And what about the balance?

What is the total pension that is being offered?

dunstonh

So, what they are guaranteeing what is actually an inferior rate. How can this possibly be construed as a benefit? They have you over a barrel with their quotation because going via an IFA would cos x thousand pounds, and they know it. 

Although an IFA is probably cheaper than going to an annuity quote engine site.

Ther are no guarantees that the GMP/GAR terms are better than the open market/enhanced terms available.   In the vast majority of cases they are though.  Did you include indexation on the quote site?

Tommohawk

xylophone said:

You have a S32 policy following a buy out of a  contracted out DB pension?

On transfer the pension included a post 6/4/88 GMP,   S9 (2B) rights arising from the  "reference scheme test" which applied to Contracted Out Salary Related Schemes up to 6/4/16 and an excess over those amounts?

Why are you considering only the GMP element?  And ignoring the inflation linking?

There must be some form of  inflation linking for the S9 (2B) rights?

And what about the balance?

What is the total pension that is being offered?

Thanks for your response. I wish I'd kept my post simple! I was just hoping to explore whether the GMP actually confers any benefit. 

This scheme relates to contributions I made over short period decades ago, and I have no idea what the original terms were. It has been transferred from one provider to another and I have mountain of paperwork for this one scheme. According to one IFA it is apparently a section 32 buy out, though I have no idea what that means!

I don't understand the second question I'm afraid.

I'm considering only the GMP element because that's what my query centres on. The inflation linking for this is 3% as stated in my original post

The S92b element does indeed have linking, but a) its a small amount and so not really significant, and b) the inflation linking element is RPI capped at 2.5% and it's difficult to build that into a comparable annuity quote -  they tend to offer RPI or a set rate, but not a combination or cap.

The balance is also a smaller amount, and because it doesn't have any guarantee the query doesn't really relate to this element. 

The total pension is the sum of the three components, but again I'm only interested in the significant component with GAR.

dunstonh said:

So, what they are guaranteeing what is actually an inferior rate. How can this possibly be construed as a benefit? They have you over a barrel with their quotation because going via an IFA would cos x thousand pounds, and they know it. 

Although an IFA is probably cheaper than going to an annuity quote engine site.

Ther are no guarantees that the GMP/GAR terms are better than the open market/enhanced terms available.   In the vast majority of cases they are though.  Did you include indexation on the quote site?

Puzzled by your first comment I'm afraid! I've got several online annuity quotes which are provided gratis, but never had an IFA offer quite that good a rate! I think I must misunderstand you?

Yes I included indexation. It was completely like for like, no differences at all. Same pot, same cover for spouse, same guarantee period, same (3%) indexing, paid monthly in arrears, same start date.

TBH as I understand it, and this is really my point, whilst annuities rates are proportional primarily to investment yields, the absolute level offered depends only on open competition. If there were only one provider, there would be no competition, and rates would fall. Please do correct me if I'm wrong on that.

So why would providers offer anything more than necessary? They appear to fund the GAR by simply reducing the sum paid out, therefore it seem to be a dubious benefit, in my  case at least.

 

xylophone

According to one IFA it is apparently a section 32 buy out, though I have no idea what that means!

See https://www.financialadvice.net/s32_buy_out_plan/zone/1288

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/495377/pension-benefits-with-a-guarantee-factsheet-jan-2016.pdf

xylophone

And have you and your wife obtained state pension forecasts?

https://www.gov.uk/check-state-pension

Tommohawk

Thanks for the links - they are very helpful, and yes we have state pension forecasts done.

Still leaves me with my query though! What does the guarantee amount to? A quote from your second link:

"The benefits are safeguarded even if the guaranteed annuity rate promised is below the rates currently being offered on the open market."

So in my case a guaranteed substandard rate?

xylophone

"The benefits are safeguarded even if the guaranteed annuity rate promised is below the rates currently being offered on the open market."

I think that this section is just pointing out that if there is a GAR then there is a safeguarded benefit situation and that therefore (depending on the value) appropriate advice would be needed before a transfer out could be arranged.

Your policy doesn't have a GAR - it has GMP/S9(2B) rights which are also safeguarded benefits.

Tommohawk

xylophone said:

"The benefits are safeguarded even if the guaranteed annuity rate promised is below the rates currently being offered on the open market."

I think that this section is just pointing out that if there is a GAR then there is a safeguarded benefit situation and that therefore (depending on the value) appropriate advice would be needed before a transfer out could be arranged.

Your policy doesn't have a GAR - it has GMP/S9(2B) rights which are also safeguarded benefits.

Fair enough. But the fact remains that the comms from Reassure state:
"Your guarantee is important don't risk losing it" and  "to benefit from your guarantee you must buy an annuity using Reassures retirement offering".  

But the part of the pot being used to fund this would buy a better deal WITH THE SAME TERMS on the open market.

This is grossly misleading. Presumably they get around the mis-selling issue by issuing the caveat that one should seek advice etc etc.

jamesd

GARs are significant because those do not require advice from a pension transfer specialist, a normal adviser with investment permissions will suffice.

This doesn't help with GMP.

msallen

Dale72 said:

and the pension industry protection squad spring into action!!

I shouldn't worry too much about them. Someone else who knows nothing about anything, except that all financial institutions and people that work for them are inherently evil, will be along soon to add some balance ...