Safeguarded Rights Advice Limit

Safeguarded Rights Advice Limit.

Many people hit a barrier when it comes to trying to take their pension under the new flexible pension drawdown rules that started in April 2015. This is the requirement for funds worth £30,000 or more that are being transferred to a flexible pensions drawdown policy where a financial adviser must sign a form to confirm that you have sought financial advice. Given that a financial adviser is liable for the advice that they give and must retain all records of discussions and advice for a pension transfer indefinitely, this advice is not cheap.

Many people are "caught between a rock and a hard place" as the costs for advice can outweigh the benefit of moving to flexible drawdown.

It is common knowledge that transferring from a salary -related/defined benefit pension scheme, where you are giving up a guaranteed income for life, to an investment linked flexible drawdown scheme, where the value can rise as well as fall and has no guarantees, involves high-level financial planning advice from a financial adviser that has a special pensions qualification and special authorisation from the Financial Conduct Authority to conduct the specialist activity of "pension transfers and opt outs".

A new phenomenon is currently causing a problem and that is the issue of "Safeguarded Rights" pensions. These not only include salary -related/defined benefit transfers but also any other pension with an underlying guarantee for example a personal pension plan with guaranteed annuity rates attached to it. Again, by transferring away from a guaranteed annuity rate you are moving away from something that is comparatively secure to a flexible drawdown scheme where there are no guarantees and the values of your pensions can rise as well as fall. The same red tape in the advice process that applies to defined benefit transfers also applies to safeguarded rights transfers.

The current issue is that many safeguarded rights personal pension plans with guaranteed annuity rates must be calculated in a similar way to defined benefit pension schemes when looking at transfer values and therefore, a very small pension fund with a guaranteed annuity rate attaching to it, all of the sudden can have a value attached to it for safeguarded rights in excess of £30,000 and as a result full, regulated advice must be sought for any transfer to flexible drawdown in addition to a burden on the pension scheme when calculating the value (usually an actuarial calculation will be required which places a significant administration burden on the existing pension scheme).

Pension providers have been lobbying for a simpler valuation basis for guaranteed annuity rates and this week the Department of Work and Pensions (DWP) has confirmed that it is considering changes to safeguarded right pension valuations where the actual fund value can be used rather than the projected value of the pension at retirement with a guaranteed annuity rate applied to it.

Comment

We have to agree that a simpler method will avoid confusion for the consumer in that there is a danger that they do not understand that the current fund value of their pension is the amount that would be transferred but a safeguarded rights value must be calculated and used to work out whether it is in their best interests to transfer or not and indeed the safeguarded rights "theoretical value" will usually take them above the £30,000 threshold and therefore full advice must be sought even if the actual transfer value of the pension is a mere £2,000 or £3,000 in total.

We do not believe that a simpler method for calculation should be used. Whilst we agree that a simpler method will avoid confusion as mentioned above, it does not remove the fact that a client wishing to transfer their personal pension to a flexible drawdown scheme could be giving up extremely valuable guaranteed annuity rates in doing so and placing a real value on the guaranteed annuity rate to give a "theoretical value" will hopefully stress the importance and value of the pension scheme that they have and what they would be giving up if they continued to transfer to a flexible pensions drawdown scheme.