If you have a Final Salary scheme, could now be a good time to cash in your pension? That was the question posed by MoneyWeek last month. They argued that a 30-year “bull market” for bonds may be about to turn bear-ish, looked at prospects for increases in inflation, and then discussed the pros and cons of cashing-in now –

“Imagine you had invested in something back in 2009 and it had returned 25% every year for the past seven years – a total return of about 480%. Then imagine that the value of that investment was 100% linked to the bond market. What would you do?

The market has taught us (over and over again) that returns of 20% plus are unsustainable over the long term. And it is beginning to look like the 30-year bond bull market might end with more of a crash than a whimper: the global bond market has just had its worst month in 25 years. So I think I know what you would do: you’d sell it – as fast as you possibly could.

You may be wondering what this fabulous investment is; it is a defined benefit pension scheme. Back in 2009, a friend of mine in his mid-40s asked for a transfer value for a fund expected to pay out the equivalent of £5,000 a year when he turns 65. The answer was £63,000 – 12 times the expected annual income. That was interesting, but not enough to be worth following up. An inflation-linked income (up to a maximum of 5% a year in this case) guaranteed forever is an unusually valuable thing.

He asked again this year. This time the answer was nearly £300,000 – 40 times the expected annual income (which is now more like £7,000). Wow. We all know by now what has happened here ¬– pension funds have felt forced to value their future liabilities based on long bond yields in the UK; yields which hit record lows earlier in the year. That has translated through to individual transfer values: the more bond yields have fallen, the more transfer values have risen. So much so that even the smallest of pensions is worth a rather large fortune.”

Thousands of workers could lose out on their state pension, receiving less than they expected when they retire. Up to 50,000 people, mostly women, who stopped work for a while to care for children, could be hit by the problem, according to Steve Webb, the former government Pensions Minister.

Lovemoney.com explains –

“Your State Pension entitlement is determined by the number of years of National Insurance contributions you have made, which you build up when you work… In 1978 the Government introduced Home Responsibilities Protection, to build up a parent or carers’ State Pension entitlement… This meant if you chose to spend time at home raising children and received child benefit your National Insurance record was protected and you should get the same entitlement you would have built up if you had been in work… The system was replaced with National Insurance credits on April 6, 2010… The problem is that child benefit and NI records were held on two separate computer systems during the 80s and 90s… In theory the information held on the two systems should be easily cross referenced and reconciled, however it’s likely that errors and conflicting information will occur… Webb has warned that tens of thousands may not receive as much they should because of the possibility of records becoming distorted from this poor record keeping.”

Update 2016 – the type of funds described below are not often available these days. To find out what options are currently available, please fill in the form on the right

Transfer your funds to a Self Managed Pension Trust, and YOU decide what to do with YOUR money

You will have complete control over the money you have saved in your pension…
…some people decide to use the money to pay off expensive debts
…some people use it to make investments they think will produce a better return than their current pension scheme
…some people use it to start a new business, invest in property, or invest in an existing business

Features of the scheme –

• The process is fully legal (backed by legal opinion from leading QCs)
• Tax-efficient and fully disclosed to HMRC
• Run by an OFT registered company (Office of Fair Trading)
• Running successfully for over 5 years
• Using Pension Trust structures that have been operating successfully for over 21 years

You may have seen warnings from the FSA (Financial Services Authority) and other authorities about “pension loans”, “pension unlocking” or “pension liberation” schemes, saying that many of these schemes are scams… and some are actually illegal. What are the problems with such schemes?

1. They take 40-70% of your pension as “commission” for their services, leaving you with as little as 30% of your pension’s current value
2. They transfer your pension to “highly dubious” unregulated investment schemes, often based overseas, which sound “too good to be true”… and probably are!
3. They may mean that the tax man (HMRC) will ask you to pay 55% tax on the money you liberated from your pension before the age of 55
4. They may involve making a loan to you now, holding your pension as security. If anything goes wrong, you could be left without any pension when you retire

How is our scheme different?

1. You keep at least 85% of the current value of your pension
2. You take control of your money. Your money remains in the UK. You, and only you, decide what to do with the funds
3. Our scheme is tax-efficient, fully disclosed to HMRC, backed by legal opinion from leading UK Tax Barristers (QCs), and further backed by Professional Indemnity Insurance
4. There are no “loans” and no money to pay back in the future – your money is transferred into a trust which you, and only you, fully control

Find out whether this could work for you – book a free phone call today, using the form at the top-right of this page.

At the time of writing the legal status of some pension loans schemes is under question. Last year the use of “pension reciprocation plans” (which involved loans from one pension scheme to another) was declared illegal by the High Court in the UK. But since then other schemes have sprung up to allow people to get early access to their retirement fund. While these new schemes might use the name “Pension Loan” (because customers are familiar with that term) they do not usually involve any lending or borrowing.

Usually these schemes involve transferring your pension into a SIPP or another form of trust (a pension fund is a trust). During this process you may be able to “release” some or all of your pension funds immediately.

The amount of cash you will be able to release will depend on the current value of your pension fund. Generally you have to have at least £15,000 in your fund to make it worthwhile. And if you have over £30,000 one scheme we work with may be able to help you release up to 90% of the money.

Most of the “pension loans” companies you see advertising nowadays are in fact using one of these Pension Transfer or Early Pension Release methods to help you access some of your funds before retirement. You should be aware that if you do release money from your pension early, it will reduce the amount you have available when you do retire. Think carefully about your options, and if you are not certain, consult a suitable IFA (Independent Financial Adviser).

If you are unsure, or just want to talk about your options, please fill in the form at the top-right of this page, to book a free call with one of our experts. They will be able to tell you what is available for your individual situation.

Please note that our experts do not give financial advice, but they will be able to provide you with the information which you can then discuss with an IFA who can give you further advice if you are not certain whether this is the right option for you.

The good news is, we’re all living longer! Longevity, as the experts call it (how long we live, on average) is rising in the UK.

The bad news, from today’s UK budget, is that the State Pension Age (SPA) will be linked to longevity measurements, and so will also be rising as we all live longer. So those Golden Years of retirement you’ve been planning for may have to wait a bit longer, if you are not already close to retirement age!

The Employee Benefits website writes about today’s announcement –

“The government will commit to ensuring the state pension age is increased in future to take into account increases in longevity.

It will also publish proposals at the same time as the Office for Budget Responsibility’s (OBR) 2012 Fiscal sustainability report this summer.

According to Chancellor George Osborne in the 2012 Budget report, this action is being taken to tackle long-term fiscal challenges associated with an ageing population.”

The International Longevity Centre (ILC) has issued a report that suggests the Government should allow people early access to their state pensions.  They argue that it would encourage people to work longer.

Citywire summarised the ILC’s suggestions –

“It has published a report, Gradual Retirement and Pensions Policy, which surveyed 1,000 people and found 55% supported a ‘graduated’ state pension, allowing savers access to their pension before they retire and enabling them to reduce their working hours.

‘Many older people recognise the benefits of staying in work for longer but nevertheless perceive the government’s current strategy as a threat to their hard-earned entitlements,’ it said.

A Department for Work and Pensions spokeswoman argued that by abolishing compulsory retirement at 65 the government had already introduced flexibility around retirement saving.

‘The state pension is already graduated. It may be taken at any time after the state pension age, and the government offers generous incentives to those people who take their state pension later,’ she told the Telegraph.

In April the government rejected calls for early access to pensions, arguing there was ‘limited evidence’ the measure would improve the level of pension contributions.”

Pension Consolidation is an issue that government minister Steve Webb wants the pension industry to tackle. The need is obvious, as you go through your working life you may acquire several different “pension pots”. You may have worked for several different companies, or the company you worked for may have gone through mergers and acquisitions. So it makes sense to be able to “consolidate” all those smaller pension pots into one larger pot.

Two of the biggest UK pension providers – Standard Life and the Prudential – are discussing one solution, a free online “Consolidate my Pension” service… a “pensions clearing house”. But this would be an “execution only” service, meaning that it would only be suitable for professional advisers working on behalf of their clients, or highly financially-savvy individuals who are confident navigating their way through the jungle of options and clauses involved. It would also require every UK pension provider to sign up to the scheme, which is a huge job!

But, as a recent Citywire article points out, even the idea of pension consolidation is much more complicated than it seems at first. Each pension may have additional benefits that must be assessed carefully against the transfer value being offered by the pension provider to see if the value is reasonable… and that is not a simple task –

“For the unwary and those who don’t have the benefit of advice an execution-only consolidation platform is fraught with danger – even if individuals are consolidating only ‘money purchase’ defined contribution pensions. Will investors have sufficient experience to know that they could be giving up hugely valuable guaranteed annuities on personal pensions, particularly if the policies were written many years ago when annuity rates were much higher than today?

Many may want to consolidate their pension policies only to discover that there are huge penalties for doing so, particularly if they are ‘with profits’-type policies subject to a punitive ‘market value adjuster’. What about increases in charges which, over time, can seriously diminish the value of the ultimate pension pot? A rise in charges from 1% a year to 1.5% a year may not sound much, but over 20 years it will have a significant detrimental impact on the accumulated savings.

One of the major problems is that for a person with, say, four pensions each worth around £3,000, the cost of advice is out of proportion to the amount involved. Most IFAs need to charge around £125 an hour, and it could easily take four hours to establish if just one former employer’s offer of a transfer value is reasonable, let alone four.

The answer for most will be to take an active interest in their pension savings – and not transfer out of a final salary linked scheme. If the individual has several pension pots from former employers which are linked to final salary, they need to keep tabs on them. This can be done through the tracing service offered by the Pensions Service. The Pension Tracing Service has access to information on more than 200,000 pension schemes.”

Click here  to visit the Government’s Pension Tracing Service website. And, as always, if you are unsure consult a qualified Financial Adviser before taking any action that may affect the future value of your pension.

Quick update: The Financial Times published an article last week, explaining how inflation-linked annuities can increase the amount of cash you are able to release from your pension using “flexible drawdown”. A brief excerpt from the FT article –

“Investors have more chance of being able to withdraw large sums from their pension funds as inflation-linked annuities will now be counted towards the income needed to qualify for a ‘flexible drawdown’ facility.

Since April this year, investors who have a minimum of £20,000 in secure pension income have been able to move into flexible drawdown: a new pension arrangement that does not have limits on the amount drawn from a fund, unlike capped drawdown.

Up until last week, income from annuities linked to the Retail Prices Index (RPI) was not included in the list of “secure income” that can count towards the £20,000 Minimum Income Requirement (MIR).

Tens of thousands of individuals hold these index-linked annuities to protect their income against the effects of inflation, which can erode real spending power.

However, in an apparent u-turn over what counts as secure income, the government has now added index-linked annuities to the list of qualifying income sources.

Flexible drawdown providers said this decision would boost the number of retirees who can take advantage of the new pension freedoms.”

Like Pension Release, Equity Release is often considered a “last resort” option. Your pension and your home are probably your two biggest financial assets, and you’ve spent many years investing your money in them. The last thing you want to do is reduce their value, or put them at risk. However, sometimes people are in a situation where they need to consider the options of last resort.

If you want to find out more about your Pension Release options, fill in our enquiry form to book a free phone call. If you want to find out more about Equity Release, James Coney at ThisisMoney.co.uk wrote a good introductory article.

He makes the point that while Equity Release may make you feel very unconfortable, it may be a better option than poverty (edited highlights below) –

“Figures from the Office for National Statistics show there are an estimated two million pensioners living below the breadline… With pension payouts falling and fuel and food bills rising, the number of poor pensioners are only going to increase, particularly as the sources of income we use to fund our retirement have changed.

Just 120,000 pensioners have released equity from their home. I wonder how many of those two million pensioners living below the breadline are sitting in homes worth tens, if not hundreds, of thousands of pounds? According to insurer Aviva, the over-55s have £1.9 trillion of equity.

But equity release, done right, is an efficient way of taking money from your home. It shouldn’t leave your family struggling with a debt they can’t afford to repay after you have gone.

Rates are under 7 per cent — certainly few banks would be prepared to offer a personal loan to a pensioner at that price.

If you want a dream holiday, new car or are simply worried about day-to-day expenditure, there are no cheaper options.”

If you are considering Equity Release as an option, the article is a good read. And check out some of the links in the article to other information about Equity Release on their website.

The Financial Times reports that the DWP (Department of Work and Pensions) is releasing a new “jargon buster” to clarify some of the terms that are used in the Pensions industry. They quote Steve Webb, Minister for Pensions –

“It [the new language guide on pensions] looks at what language we should keep and what we should replace and makes recommendations for language that is more simple and straightforward”

and…

“In a world where seven million people aren’t saving we simply can’t hide behind unintelligible language and confusing jargon. This was never more important than right now as we move towards the launch of automatic enrolment.”

We searched the DWP website, but couldn’t find the Jargon Buster on there. We’ll update this article when we find a link!

Update – The BBC has a very useful video explaining what some common pensions terms mean – accumulation, asset classes, equities, decumulation, annuities and other terms are explained in plain English