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If you have a personal penion with a safeguarded benefit the chances are you will need to take advice ?

Many people have a pension that contains something called a safeguarded benefit. While the most obvious of these is a final salary pension, it is also possible to have a safeguarded benefit in a personal pension. If you have a pension that contains a safeguarded benefit, then in the majority of cases it is compulsory to take financial advice if you want to give up the safeguarded benefit and switch to drawdown.

This is something we can help with.

The rest of this article discusses safeguarded benefits that occur within personal pensions otherwise known as defined contribution pensions. In this case the safeguarded benefit will fall into one of two categories. It will either be a Guaranteed Annuity Rate (GAR) of a Guaranteed Minimum Pension (GMP). Below we will explain what these benefits are and why it is compulsory for you take advice.

As we hope you will see below, it could very well be much better for you to stay with these Safeguarded benefits rather than transfer into drawdown. Equally a transfer could be in your best interests. Obviously, the analysis of which outcome is best will not be as easy as shown in the examples below. This is why the government have made it a legal requirement for those with safeguarded benefits to take advice. 

Guaranteed Annuity Rate (GAR)

If we look back several decades, then the only way to take income from a personal pension was by using an annuity. Income Drawdown was not introduced until 1995.

Traditionally, after taking any tax-free cash, a customer would need to give their pension fund to an annuity provider who in exchange would give the customer a guaranteed income for life. There were many factors that determined how much this guaranteed income would be, but one of the most important was the annuity rate you were offered. Although it is a complex formula, it is easiest to this of this as an interest percentage that is applied to your pension fund.  This percentage would dictate the income you were offered.

Therefore, the higher the percentage, the higher the income you would receive. In the 1970s the annuity rate fluctuated between 14% - 16%. By the time drawdown was introduced in 1995, the average annuity rate had more or less halved. * This obviously meant that people in the 1970s were getting twice as much income for the same fund amount than those in the 1990s.

This overall decreasing trend in annuity rates has continued to the present day and has caused many people to doubt the value of annuities. However, it could be the case that a pension that has a safeguarded guaranteed annuity rate could offer better value than any other product. A customer may nevertheless not consider this as an option wrongly believing that annuities are bad.

To use a simple example, a 60-year-old with a fund of £50,000 may be offered an annual annuity income on the open market of £3,000 per annum. They may take the view that they would need to live more than 16 years to get their money back and not consider this good value. Alternatively, another 60-year-old may also have a £50,000 pension fund, but they have a guaranteed annuity rate that would pay them £6,000 per annum. This would be equivalent to receiving 12% interest on the fund amount for life. This is a very good return and if they lived for 20 years it would see them receiving £120,0000 from an initial sum of £50,000.

The problem is would the customer appreciate this, or would they be put off by the fact it is an annuity ?

Guaranteed Minimum Pension (GMP)

GMPs occur in pension contracts that have come via an employer.

Part of your employers National Insurance contributions went towards a top-up to the state pension. In some cases, the pension trustees ‘contracted out’ their members from the top-up pension in exchange for a reduction in their National Insurance payments. They had to guarantee to pay you this top-up from their pension scheme. This guaranteed top-up is known as a Guaranteed Minimum Pension (GMP). Very simply the pension fund must pay you this level of income, even if there is not enough money in the fund to cover it.

As an example, you could have a GMP from a pension fund worth £6,000 per annum. If the fund is only worth £50,000 this may not be enough to pay the full GMP based on the conversion rates used by the pension scheme. However, the pension trustees have no choice and must pay you the full £6,000 per annum.

On occasions when there isn’t sufficient money in the fund to cover the full GMP the pension may reduce or completely stop any tax-free cash payment.

It is easy to see from the examples above that even though the customer may not need or want a regular guaranteed income (or they may be put off by the term annuity) there is nevertheless outstanding value being offered by both the GAR and the GMP. This degree of financial return may not be available on the open market.

Compulsory Advice

The government and regulator were worried that people may be persuaded or enticed by what could be a large cash sum to transfer their pension elsewhere. They may not fully consider (if at all) the benefits that a guaranteed index linked income for life would give them. They could erroneously be swayed by statements made by friends that ‘annuities are not worth it’, or they could be in such difficult financial circumstances that they are only considering the immediate benefit of the lump sum and forgetting that an income for life is the much better outcome for them. It is for these reasons and many more that it has been made a legal requirement to take advice before you transfer a safeguarded benefit into drawdown.

Who can give this advice ?

Well the easy answer is that we can. However, it is important to say that not every financial advisor or firm can.

We have heard many stories from customers who say that they have approached financial advice firms who say they will not advise you and the only thing they are willing to do is set-up the annuity. We suspect that many firms who say that nothing else can be done, say this is because they don’t have the required permissions or qualifications to offer the advice. It could very well be the case however that a transfer is in the best interests of the customer.

The law says that the advice must be given by a firm that has permission under part 4A of the Financial Services and Markets Act 2000, or resulting from any other permission of that act, to carry on the regulated activity in article 53E of the Financial Services and Markets Act 2000.

Most financial advisers and their firms do not hold this permission. What this means in layman’s language is that you will need to use a ‘pension transfer specialist’ to give this advice.

We hold the relevant permission and we are happy to advise you. Our advice must be in your best interests which means that if we can see that there is a benefit to you in transferring we will recommend the transfer, although we will not hesitate to recommend you stick with the safeguarded benefit if we believe it is in your best interests to do so.

We are happy to provide you with a no obligation quote. Simply use any of the contact methods available on this website. If you use the form opposite, then select the ‘personal pension’ option and inform us that you have a GAR or GMP later on in the form. Equally you can send us an email to help@platinumifa.co.uk and explain what safeguarded benefit you have and what you want. We will send you a no obligation fully costed quote by reply.

* University of Bristol and Centre for Research in Applied Macroeconomics. UK Annuity Rates and  Pension Replacement Ratios 1957 – 2002. Edmund Cannon and Ian Tonks. March 2003

Nothing in this article should be taken as personal advice and recommendation. UK tax rates and legislation are liable to change. Products, concepts, rates, legislation and rules referred to in the article above may not be current at the time you read the article.
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