When people worked for a single employer for most of their life, finding clients’ pensions was relatively simple. But with more frequent job changes, combined with the introduction of automatic enrolment into workplace pensions, things have now got a lot more difficult.

For longstanding clients, there should be a paper trail and good records of all pensions, but where someone only seeks advice later in life, it can be a challenge to track down their historic plans.

An obvious first port of call is the government’s Pension Tracing Service, but the service offered is more limited than the name suggests. What the (free) government service does is act as a glorified telephone directory, providing contact details for schemes, assuming the user has information about the employer or pension provider.

This is a good start but, even where a match can be found, the information may be dated and can even give contact details for pension administrators or providers who are no longer trading.

A surprisingly fruitful approach is to use the client’s own networks of former colleagues. While the client may not have retained pension paperwork, they may well have a more diligent former colleague who does have contact details. Even if the client is no longer in contact with former colleagues, the wonders of LinkedIn and other social-media platforms can be a surprisingly effective way of tracking down potential members of the same scheme.

Another option is using the Companies House database to find out what happened to the client’s former employer. Very often people tell me they think they have an old pension but that the company they worked for no longer exists.

If the company was taken over, it is possible Companies House records will lead you to the successor firm, which may know about historic pension provision.

Where the former employer has gone out of business, it is possible the Pension Protection Fund (PPF) may have become involved. In the case of a defined benefit scheme, where the sponsoring employer went bust after the PPF was created in 2005, it is worth checking the list of schemes on the PPF website to see if compensation is being paid.

And for some insolvencies before 2005, there is a separate Financial Assistance Scheme (FAS), also administered by the PPF, which may be a source of potential payments.

In some cases, a company goes bust in circumstances where the pension scheme had insufficient assets to pay full benefits but enough assets to do better than PPF compensation levels.

In these cases – known as ‘PPF-plus’ cases – the assets of the scheme will have been used to buy bulk annuities from an insurer, so it may be worth tracing the policy through that route.

Another source of information can be HM Revenue & Customs (HMRC), particularly in the case of contracted-out pensions. If someone was in a contracted-out scheme, HMRC would generally hold a contracted-out scheme reference number which can be used to track down the scheme.

HMRC would also hold information about the name of an employer, which can help to narrow down the search. Information about contracted-out employment can be applied for via the HMRC website, while more detailed personal information can be obtained by means of a ‘subject access request’.

These are just a few of the routes I have used to help track down missing pensions. I’ve learned that every pension hunt needs its own unique strategy, depending on how much information the client holds and what type of pension it was.

In some cases, it turns out there was no pension at all because the client transferred out or cashed out their pensions years ago and has now forgotten. But when the search is successful, it is a great pleasure to reunite a client with a lost pension.

Steve Webb is a partner at consultants LCP and was pensions minister 2010-15

The post Steve Webb: Top tips for a client pension hunt appeared first on Money Marketing.

Later this year, UK voters will go to the polls and the parties will spend the campaign period stressing the apparently fundamental differences between them.

But for those whose work involves helping clients plan for their financial future, how much difference will it make who wins the election?

My short answer – as a reformed ex-politician – is ‘much less than you might think’.

It would be fair to say, of course, that we know relatively little about what a potential future Labour government might actually do in office, and the party itself is probably far more focused on winning the next election than on coming up with a detailed policy prospectus.

Whoever runs the UK at the moment faces severe constraints on their ability to be radical

But from the policy announcements that have been made recently, it is starting to look much more like evolution than revolution, especially when it comes to financial services.

For example, at the end of January, Labour published a document entitled “Financing growth – Labour’s plan for financial services”. Among six policy priorities set out at the start of the document included “enhance the competitiveness of the UK’s financial services sector”, “lead the world in sustainable finance” and “reinvigorate our capital markets”.

What is striking about this document and these priorities is that if the same document had been published under a different cover by the current government, no one would have batted an eyelid.

This apparent continuity of policy raises a fundamental question – if the two main political parties have different ideologies, different priorities and tend to represent different parts of the population, how can they end up saying much the same things?

Any government of any political colour is going to be very interested in using ‘other people’s money’ – such as the assets in pension funds – to deliver its priorities

The short answer is that whoever runs the UK at the moment faces severe constraints on their ability to be radical. The fact the tax burden is at its highest level in decades means the scope for doing more through tax-funded public-expenditure increases is limited.

Meanwhile, government debt and borrowing are still at very high levels (with an associated debt interest servicing costs), so simply borrowing more may not be an option. And more spending is likely to be needed simply to maintain current levels of public services because of factors such as the ageing of the population.

Against this backdrop, any government of any political colour is going to be very interested in using ‘other people’s money’ – such as the assets in pension funds – to deliver its priorities.

Now, it may be argued the Labour Party has made one commitment that would mark a distinct divergence from the Conservative policy agenda. This is the proposed reinstatement of the lifetime allowance (LTA) on tax-privileged pension saving. But even here it is becoming progressively less certain this is what will happen.

Labour has gone very quiet on the LTA change, and chose not to seek to amend the recent Conservative Finance Bill that completed its abolition

Shadow chancellor Rachel Reeves has said there will only be a small number of specific tax-raising measures under a new Labour government. These include increased taxation of non-doms, VAT on independent schools and an end to ‘tax breaks for private-equity bosses’. There has also been talk of changes to stamp duty on overseas buyers and a potential windfall tax on energy company profits.

But Labour has gone very quiet on the LTA change, and chose not to seek to amend the recent Conservative Finance Bill that completed the abolition of the LTA. It seems increasingly likely the LTA will either be brought back at a much higher level, thus affecting far fewer people, or that reform of pension tax will be considered as part of the more wide-ranging review of pensions and retirement promised by the party.

Don’t get me wrong, I think it matters who runs the country and I will certainly be casting my vote when the time comes. But, at least in the short term and with respect to financial services, the shackles of the wider economic backdrop may mean it makes a lot less difference than it might once have done.

Steve Webb is a partner at consultants LCP and was UK pensions minster 2010-15

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One of the biggest shadows hanging over financial planning is the proposed reintroduction of the lifetime allowance (LTA).

But if we assume we will have a new government soon and that it will bring back some form of LTA, how might they go about it?

It is worth noting that even abolishing the LTA has proven to be far from straightforward.

There are hundreds of references to it across multiple pieces of legislation and removing them without unintended consequences is proving challenging. This is particularly so given the government’s decision to retain a lifetime limit on tax-free cash.

Given the pressures on the NHS, we can ill afford to lose the services of experienced consultants

Similarly, reinstating the LTA would be far from simple.

There are at least three major challenges that would face a new Labour government which wanted to bring back the lifetime limit.

The first, in simple terms, is what to do about the doctors?

One of the main reasons chancellor Jeremy Hunt abolished the LTA is the evidence that senior clinicians were choosing to retire prematurely for tax reasons. Given the pressures on the National Health Service (NHS), we can ill afford to lose the services of experienced consultants. The Conservative government decided that abolishing the LTA was a “price worth paying” if it kept them working for longer.

A new government would be equally keen to avoid an exodus of senior public servants, and it would also face pressure from the trades unions to avoid tax changes which particularly hit senior public sector workers.

Simply reintroducing the LTA at its old level could represent a form of retrospective taxation and would widely be seen as unfair

Unless the Labour party is very clear – probably this side of the election – how its proposed carve-out for doctors will work, there is a risk its arrival in power will coincide with a highly unwelcome loss of top NHS staff.

The second challenge is what to do about people who have ‘filled their boots’, putting large amounts into their pensions following the abolition of the LTA. This could include those who had previously relied on various forms of ‘protection’, introduced following previous cuts in the LTA, and who had renounced that protection in favour of building up a bigger pension pot.

Simply reintroducing the LTA at its old (pre-April 2023) level could represent a form of retrospective taxation and would widely be seen as unfair.

A new government would either have to design a fresh form of protection or might have to bring back the LTA at a much higher level.

If a new government decided it wanted to take account of past crystallisations, this could be challenging

A third challenge would be what to do about those who had a mix of pensions they had crystallised and those they were yet to draw. Previously, these people might have used up a large chunk of their LTA, with limited scope for further tax-privileged saving. If a new government reintroduced an LTA, they would want to avoid re-setting everyone’s LTA usage ‘meter’ to zero, as this would allow such people to ‘double dip’ and enjoy another large slice of tax-free saving.

But if a new government decided it wanted to take account of past crystallisations, this could be challenging.

For defined benefit, they could perhaps infer from pensions in payment how much LTA was used up when the pension was first drawn. This was done in 2006 when the LTA was first created. But it would be far harder to reconstruct past defined contribution crystallisations, especially where the money was no longer within a pension or drawdown wrapper.

We might see emergency ‘anti-forestalling’ legislation to prevent people taking advantage of the window to April 2026 to max out on pension saving

Bringing back the LTA would be complex and could not be done quickly. If the election is in autumn 2024, it would be exceptionally difficult to implement these measures for April 2025, and a start date of April 2026 seems more realistic.

So we might see emergency ‘anti-forestalling’ legislation to prevent people taking advantage of the window to April 2026 to max out on pension saving.

While it is easy to say you will reinstate the LTA, it is a lot harder to do so.

Steve Webb is a partner at consultants LCP and was pensions minister 2010-15

The post Steve Webb: Three huge challenges that would hold LTA reintroduction back appeared first on Money Marketing.

If the polls are to be believed, a Labour-led government is likely to be elected next year.

That new government could make an emergency Budget statement during 2024/25 and implement changes with effect from April 2025 or even sooner.

But what do we know about the decisions a potential future Labour government might make?

The short answer is remarkably little.

Opposition parties with large poll leads have very little incentive to be explicit about their tax plans. Any detailed tax plan provides ammunition for their opponents, as the late John Smith found after tabling Labour’s detailed tax plans ahead of the 1992 general election.

Advisers may be sceptical about how far they can rely on these pledges

Much of what we have heard from the shadow chancellor Rachel Reeves has been about what a Labour government will not do. For example:

• There are ‘no plans’ to increase rates of income tax
• There are ‘no plans’ for a wealth tax, and would not increase capital gains tax or introduce new taxes on property income
• There are ‘no plans’ to cut higher rate pension tax relief

The rather short list of individual tax measures which have been floated include:

• Reducing tax breaks for those with ‘non-dom’ status
• Removing the charitable status of private schools
• Removing the ability of ‘private equity fund managers’ (and others) to benefit from a tax break on ‘carried interest’

Aside from this, in a recent interview, Reeves said: “We don’t have any plans to increase taxes outside of what we’ve said”.

Advisers may be sceptical about how far they can rely on these pledges. For example, the Institute for Fiscal Studies has argued the spending plans a new government will inherit may be hard to meet.

As the present government has demonstrated, it’s perfectly possible to raise billions in extra tax revenue without raising headline tax rates

A Labour government might decide taxes need to be raised once in office, arguing a different strategy is needed now they have ‘opened the books’.

In addition, as the present government has demonstrated, it’s perfectly possible to raise billions in extra tax revenue without raising headline tax rates. The multi-year freeze of tax thresholds has added tens of billions of pounds to tax revenues without the need to raise tax rates. Similar ‘stealth taxes’ are likely to be keenly studied by an incoming government.

But one other tax measure which has been promised is the reversal of the pension measures announced in the 2023 Budget, including the reinstatement of the lifetime allowance (LTA).

We have little detail on how this might be done – though it would be equally fair to say the current government still hasn’t finished spelling out exactly how the LTA will be abolished.

I think it is quite likely the Labour party itself does not know the answer to these questions

One fundamental question is whether Labour would start everyone off with a ‘zero’ figure for the amount of LTA so far used up? Or, for example, if someone has just started drawing a defined benefit pension of £35,000 per year (and took no lump sum), might they be deemed to have used up £700,000 of their newly reinstated LTA?

My personal view is that something like this is quite likely.

But there is much we do not know. What would happen to people who boosted their pension pot since April 2023 and will be over the old LTA figure by 2024/25? Would these people face an LTA charge when they crystallise these savings, or could they apply for some form of protection? How would Labour deal with the issue of high earning doctors who were taking early retirement partly because of LTA issues?

I think it is quite likely the Labour party itself does not know the answer to these questions. Opposition parties have limited resources for detailed policy development, especially in technical areas, so these decisions may ultimately only be taken once in government.

In the meantime, it seems highly likely the prospect of a potential change of government is going to keep advisers busy, both in the run-up to a general election and when a new government begins to implement its new agenda.

Steve Webb is a partner at consultants LCP and was pensions minister 2010-15

The post Steve Webb: What a lifetime allowance return under Labour could look like appeared first on Money Marketing.

Attitudes to pension dashboards in the adviser community are divided, to say the least.

Some see it as a potential labour-saving device, enabling advisers to see all (or most) of a new client’s pensions in one place, making information gathering a lot easier and ensuring a complete picture.

Other supporters expect mass promotion of dashboards will lead more savers to engage with their pensions and increase the chance of people seeking advice.

However, critics regard it as “another government IT project” which is way behind schedule.

They question whether the public is going to be sufficiently interested to take the trouble to go online and search out pension information, and whether the large cost of the project is worth it in terms of the benefits it will generate.

The concern is that we will see a huge capacity crunch as the new 2026 deadline approaches

So, who is right, and where are we up to on the project itself?

It is certainly true that dashboards have been talked about for a very long time and the delivery of the project always seems to be several years away.

At the turn of 2023, it seemed as though we were finally making progress, with a set of legally binding deadlines for schemes and providers to connect to the dashboard. This ‘staging’ process would run through 2024 and 2025, with a switch-on to the public perhaps early in 2025.

Unfortunately, it had become apparent that the IT work involved in putting together the infrastructure was behind schedule. The pensions minister announced a ‘reset’ of the project, while the Department for Work and Pensions undertook a full review.

The outcome of that review was published earlier this month, with the result that interim deadlines for schemes to stage have now been scrapped. Instead, there will be a legally binding final date of October 2026, which will apply to all schemes and providers in scope of the project.

All it would take is one mention by Martin Lewis for millions of people to be aware

This will be coupled with an ‘indicative’ timetable for connection to the dashboard infrastructure.

The concern is that without the threat of legal sanctions, busy pension providers and pension schemes will put off dealing with their dashboard duties and we will see a huge capacity crunch as the 2026 deadline approaches.

The government has said the dashboards switch-on date could actually come before October 2026 (with some schemes adding their data after the initial go-live). But if some big schemes leave it to the last minute, this may be unlikely.

But notwithstanding the repeated delays, I remain convinced it is the advisers who see the potential of dashboards who have got it right.

A key point is that there will be a huge drive to get people to view their dashboard data. It won’t simply sit on the internet gathering dust. The government will want to launch the go-live to the public with a big fanfare, while providers who have set up their own dashboard will also want to drive engagement.

There are bound to be early good news stories of people going online and finding thousands they never knew they had

All it would take is one mention in a Martin Lewis weekly email for millions of people to be aware of this new tool.

A major attraction to the public of dashboards will be the hope of a windfall – finding lost pots. Large numbers of people now have multiple pots and may already have started to lose track of some of them.

There are bound to be early good news stories of people going online and finding tens of thousands they never knew they had. This could be a big early draw.

In steady state, dashboards will live or die by the added value services they offer. If you can see your pensions (and other key financial data) in one place with easy access and tools to help you engage, it could be as natural to look at a pensions dashboard as to check your current account balance.

And if that leads to greater engagement and more people asking more questions, the advice profession should be well placed to support people in getting answers.

Steve Webb is a partner at consultants LCP, and was pensions minister 2010-15

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Although many countries saw a rise in economic inactivity during the Covid-19 pandemic, the figure in the UK has remained stubbornly high.

As a result, we can expect to see a range of measures in the March Budget to address the issue, including some which relate to pensions.

Some have called for new restrictions on pension freedoms in order to stem the flow of early retirement

It is worth saying that ‘early retirement’ is only a very small part of the overall explanation for rising inactivity. Nearly half of the 630,000 increase is among those aged under 50.

Furthermore, the largest single group to have grown is not the retired but the ‘long-term sick’, indicating factors such as the pressure on the NHS could be part of the story.

However, it is true there has been a modest rise in those aged 50-64 who classify themselves as ‘retired’. The government is keen to tempt some of these back into the labour market as well as to discourage others currently in work from joining their ranks.

One theory is that early retirement is happening partly because of pension freedoms. Indeed, some newspapers have called for new restrictions on the freedoms in order to stem this flow.

The government thinks some have failed to understand how quickly their pension pot will run down

The argument is that the ability to tap into defined contribution (DC) pensions freely from the age of 55 is helping some to fund an early retirement to the detriment of the wider economy.

The government thinks some of the people who have done this have failed to understand how quickly their pension pot will run down. It is not clear yet if it will go as far as limiting pension freedoms but there are growing rumours it might make ‘mid-life MOTs’ mandatory, perhaps placing a legal duty on insurers to offer them to certain DC savers.

The hope is that a more realistic understanding of how long pension funds may last will discourage people from retiring prematurely (and cause those who have retired to rethink their plans).

While it is no substitute for personalised financial advice, the basic concept of a mid-life review, covering finances, health and career choices, is a good one, giving people time to make a meaningful change to their work and finances in later life.

Reforms should be years in the planning and based on thorough research. But the government is in a hurry

Details of the mid-life MOT are on the gov.uk website, which includes toolkits for employers who may wish to offer them. The self-employed can book a free ‘MOT’ which will be provided by MoneyHelper, the latest brand of the Money and Pensions Service.

It would, however, be a big step if providers were required by law to offer MOTs.  One problem is that, if the MOT is offered via insurance companies and pension schemes rather than employers, take up could be low, especially among those who had already taken the decision to retire early.

Another idea being trailed for the Budget is giving the over 50s an income tax exemption of six or 12 months if they go back to work after long-term sickness absence.

They might also be allowed to ‘run on’ their sickness benefits alongside the early months of work so that, if employment did not work out, they would not have to start a benefit claim from scratch.

Reforms to improve the labour market for older workers should be years in the planning and based on thorough research. But the government is in a hurry.

A review announced in November will be published early in 2023, with policy measures announced in March and potentially implemented in April.

This is a government which is running out of time before the next election and is looking for a ‘silver bullet’ to tackle economic inactivity.

Whether the measures being trailed so far will do the job seems pretty unlikely.

Steve Webb is a partner at consultants LCP and was pensions minister 2010-15

The post Steve Webb: Would pension changes entice early retirees back to work? appeared first on Money Marketing.

In days gone by, neither a cost of living crisis nor market turbulence would have affected most workers when it came to their pension plans. Members of defined benefit (DB) schemes could leave their employer to worry about the ups and downs of inflation and interest rates.

And cost of living pressures would have had to be pretty acute to lead them to give up their workplace DB benefits and associated employer contributions.

But in a world of defined contribution (DC) pensions, this last year has been a test of how savers will react when their incomes are squeezed and/or their pension pots are shrinking. And the emerging evidence suggests some quite surprising findings.

The vast majority of new savers under automatic enrolment are being enrolled into a DC pension. Many will have little previous pension saving and may have little knowledge of them. There was therefore a real risk that recent events could have fatally undermined this whole project.

Despite a global pandemic, war in mainland Europe, a surge in inflation and highly volatile markets, roughly nine in 10 people put into a pension stay in one. This points to a remarkably robust system.

The reality turns out to have been rather different, at least for those some distance from retirement.

The first risk was that people would simply ‘opt out’ of pensions when starting a new job. But despite some scare-mongering stories in the press, there is very little evidence this has happened at any scale.

According to analysis published by the Department for Work and Pensions, in August 2022, the proportion of newly enrolled employees who opted out of their workplace pension was 10.4% compared with 7.6% in January 2020. Although this increase is unwelcome, the absolute rate is still astonishingly small.

The last couple of years included a global pandemic, war in mainland Europe, a surge in inflation and a period of highly volatile markets. Yet roughly nine in 10 people who are put into a pension by their new employer will stay in a pension. I would say this points to a remarkably robust system.

A second source of concern would be if those who have successfully been enrolled into a workplace pension subsequently stopped saving. This is known as ‘cessation’ (rather than opting out), and some of it is simply natural ‘churn’ as people change jobs or retire.

Remarkably, in August 2022, the rate of cessation stood at 3.1%, exactly the same proportion as in January 2020. This is truly astonishing and reflects, among other things, the continuing power of inertia.

Policymakers’ attention should be focused on what is happening in later life, where there is more of a risk of people doing long-term damage in response to short-term pressures

All of that said, there are some signs that cost of living pressures and concerns over volatile markets are being seen among one particular group, namely the over 55s.

HM Revenue and Customs publish quarterly figures on ‘flexible’ pension withdrawals subject to income tax. In Q2 2021, just over 400,000 people made withdrawals worth £2.9bn. A year later, in Q2 2022, just over 500,000 people made withdrawals worth a total of £3.5bn. This is a year-on-year increase of 23% in the amount being taken out and is the highest ever level of withdrawal, which must be a source of concern.

Finally, something I have observed from listening to members of the public is that recent market turbulence has dented their confidence in DC pensions. Some are angry or confused about the falls in the value of their DC pot this year and are wondering either whether to ‘get out of the market’ to avoid further falls or whether to cash out in full at the age of 55. It is probably too soon to see this fully reflected in official figures, but it is a potentially worrying trend.

In short, talk about people opting out on joining a new firm or leaving their workplace pension because of the current financial situation is probably overblown. Instead, policymakers’ attention should be focused on what is happening in later life where there is more of a risk of people doing long-term damage in response to short-term pressures.

Steve Webb is a partner at consultants LCP

The post Steve Webb: Auto-enrolment passes its toughest test yet appeared first on Money Marketing.

A skill that more and more advisers are going to need in the coming months and years is supporting clients with debt — including hidden debt that the client may prefer their friends and families didn’t know about.

Whereas it might once have been possible to assume ‘problem debt’ was largely the preserve of those on benefits or who had faced a sudden financial shock, the soaring cost of living means many more people may find themselves getting behind with bills or turning to ‘easy’ (but often high-cost) credit to tide themselves over.

Surveys suggest even those on high incomes are getting anxious about money, while people on fixed incomes may find double-digit inflation very hard to cope with. So how can you help?

Much more common will be situations where clients on average incomes are nonetheless getting worried about paying their bills and potentially making unwise decisions about borrowing

In my spare time I volunteer with a debt advice charity and probably one of the most important things we do is stand alongside people and help them realise they are not alone.

Something I have seen time and again is what I call ‘Unopened letter syndrome’. When every letter you get is a bill or a demand or a threat, why would you even open your post?

So simply getting clients to share with you all the letters they have received — including the unopened ones — helps you understand the overall picture and draw up a plan.

Maximise income

A second thing we do is try to maximise the client’s income. This may sound obvious to a financial adviser but it is surprising how many people are missing out on help they could be getting.

There are many free debt advice charities to which clients can be referred

With a plethora of schemes designed to help, and more on the way, being aware what help is available and helping people fill in application forms can be a big support to people in trouble.

For example, most of the big energy companies have a charitable arm or other method of providing support to those in real need, sometimes writing off arrears entirely. This can lift a huge burden from the shoulders of your client.

One of the most important things we do at the charity is stand alongside people and help them realise they are not alone

The third thing we are trained to do is minimise expenditure. All too often, clients are paying over the odds for mobile phone and broadband and other household costs, while there are ways to save on bills such as water (move to a meter for a small household?).

In addition, many have got locked in to high-cost credit, meaning their debts go up every month, and rationalising their debts can substantially reduce the cost of servicing them.

A key role of the debt adviser is to liaise with creditors.

Many people in financial need are afraid of creditors and indeed may have had threatening letters from them.

But, when the creditors know they are dealing with a financially trained individual and the person in debt is engaging with their debts and trying to deal with them, sometimes they can be surprisingly accommodating.

When creditors know they are dealing with a financially trained individual, sometimes they can be surprisingly accommodating

This can include, for example, freezing interest on accounts and agreeing affordable repayment plans based on accurate information about household income and expenditure.

There are many free debt advice charities to which clients can be referred, especially if they have got into problem debt with multiple creditors.

In extremis, measures such as a debt relief order or even some form of bankruptcy may be considered if things have got beyond the point where improved budgeting and a bit more time to pay would be sufficient.

Unwise decisions

But much more common in the coming months will be situations where your clients on average incomes are nonetheless getting worried about paying their bills and potentially making unwise decisions about borrowing, which could cost them a lot in the long term.

Getting clients to share all the letters they have received helps you understand the overall picture and make a plan

The more you can make it clear to all your clients that debt is nothing to be ashamed of, and that the key to tackling it is to understand the scale of the problem and devise a plan with a trusted person, the more we will all be able to help people through these unprecedented times.

Steve Webb is a partner at consultants LCP

This article featured in the October 2022 edition of MM. If you would like to subscribe to the monthly magazine, please click here.

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I believe there is a real risk that clients may have little idea of the flexibilities open to them to reshape their DB benefits. 

Unless advisers get under the skin of the client’s DB rights, there is a risk of missed opportunities when it comes to creating the best retirement journey.

Flexible defined benefit pensions

In the past, DB pensions have been thought of as pretty rigid.  

A DB pension simply paid a standard pension at a standard age. 

But these days, schemes are increasingly offering members the chance to reshape their benefits in potentially attractive ways. 

Three which may be of particular interest are the Pension Increase Exchange (PIE), the Bridging Pension Option (BPO) and the partial DB transfer.

What is Pensions PIE?

The idea of a PIE is that the member gives up some of his/her inflation protection in return for a higher starting pension. 

This is possible because many DB pension schemes offer a higher level of inflation protection than the minimum level required by law.  For example, a scheme may offer RPI increases when the law only requires CPI increases.

With a PIE, the member can relinquish increases which go over-and-above the legal minimum and in return they get a higher starting pension – sometimes substantially higher. 

Some schemes have a PIE option built in to the rules of the scheme, but others run one-off PIE ‘exercises’, giving members (including pensioner members) the chance to reshape their benefits.

Although giving up inflation protection at a time of high inflation might sound counter-intuitive, demand for PIEs remains strong. 

If the client believes that the current high inflation rate is temporary then they may be relatively relaxed about giving up some of their future inflation protection. 

This could be especially true if they face cost-of-living pressure now and want to boost their upfront income.

What is the Bridging Pension Option?

A second DB flexibility which is becoming more popular is the Bridging Pension Option (BPO).  In this case the member starts to draw their scheme pension below state pension age but at a substantially enhanced rate. 

Once the state pension kicks in, the scheme pension then drops back. 

This can enable someone to retire before state pension age and to have a smooth income through retirement rather than a low scheme pension followed by a jump at state pension age. 

Anyone interested in early retirement and how this could be financed should be seeing if their scheme offers a BPO.

What is a partial DB transfer?

A third option is that of a partial DB transfer. 

These may be particularly relevant where a member’s pension rights are heavily concentrated in a single scheme and where a full DB transfer would represent too great a transfer of risk. 

A partial transfer allows the member to secure their core guaranteed income from state pension and (partial) scheme pension, and to enjoy flexibility with the transferred part. 

Although only around 1 in 5 schemes currently offer partial transfers, more are actively considering doing so, and this should be on the table in any conversation about structuring income in retirement.

The growth in these ‘member options’ is driven in part by DB schemes wanting to improve their funding position and reduce their risk. 

But there is a real opportunity for a ‘win-win’ in this space provided the terms of the offer are fair. 

Members can enjoy greater flexibility and a pension which pays out when they need it most, whilst schemes can move closer to financial security. 

Advisers can play their part in making sure that members are fully aware of their options and use those that are most relevant to their situation.

Steve Webb is a partner at consultants LCP, and was pensions minister 2010-15.

The post Steve Webb: Defined benefit pensions rock freedom too appeared first on Money Marketing.

The 1995 Pensions Act equalised pension ages at 65 by 2020, while the 2007 Pensions Act for the first time gave a timetable for reaching age 66, 67 and 68.

The problem for the government is that the improvements in life expectancy on which previous policy has been based have simply not materialised

The 2011 Pensions Act brought forward equality at age 65 to autumn 2018, and` brought forward the rise to age 66 by six years to 2020. 

Most recently, the 2014 Pensions Act brought forward the move to age 67 by eight years to 2028. 

The combined effect of these changes has been that a woman who was born after April 1961 could have spent the first 15 years of her working life expecting a pension at age 60, but will eventually not draw a pension until she is 67 – a huge change. 

More change to come

Just before Christmas 2021, the government launched its second ‘independent’ review of state pension ages, to be chaired by Conservative peer and former Treasury minister Baroness Neville-Rolfe. This review will consider in particular whether the planned move to age 68 needs to be brought forward.

The statutory timetable is still that we should get to 68 by 2046, although a state pension age review chaired by John Cridland and published in 2017 recommended getting to 68 by 2041. 

The expected improvement in life expectancy built in to the ONS’s 2014 forecasts has simply not happened

Until relatively recently, most expert commentators would have accepted the case for relatively rapid increases in state pension ages. The male state pension age was set at 65 nearly a century ago and no adjustment had been made in the following decades despite the huge increases in life expectancy. 

Even as recently as 2014, the Office for National Statistics (ONS) was projecting continued improvements in life expectancy, and these figures were used as the basis for the 2017 review. 

However, things have changed dramatically since then, even before we take account of any long-term impact from the pandemic.   

Any further increase beyond age 67 would be simply indefensible for many decades to come

When the ONS prepared a fresh set of population projections in 2018, it found the expected improvement in life expectancy built in to its 2014 forecasts had simply not happened. Indeed, its forecast for years lived post-65 dropped by two years between the 2014 and 2018 forecasts.

On that basis, the case for an aggressive schedule of state pension age increases starts to look much weaker, even if the pandemic has no long-term impact on our collective longevity. 

Finding a solution 

In terms of setting the ‘right’ answer for state pension age, the government set out a formula to be the starting point for any review. This is that people should expect to spend no more than one third of their adult life in retirement, with adult life starting at age 20. To give an example, if the projections suggested a 20-year-old could expect to live to age 95, their state pension age should be 70, giving them 50 years in work and 25 years in retirement. 

The male state pension age was set at 65 nearly a century ago and no adjustment had been made in the following decades despite the huge increases in life expectancy

The problem for the government is that the improvements in life expectancy on which previous policy has been based have simply not materialised. Not only do the latest figures provide no justification for bringing forward the schedule for reaching 68, they provide no justification even for going ahead with the increase to 67. 

The move to 67 is due to happen during the next parliament, with a two-year phase-in period starting in 2026. This is sufficiently near for it to be highly unlikely the Treasury would at this stage willingly hand back the billions it would save through the next round of increases.

The case for an aggressive schedule of state pension age increases starts to look much weaker

However, if the state pension age review process is to have any credibility, it must conclude that any further increase beyond age 67 would be simply indefensible for many decades to come. 

Steve Webb is a partner at LCP and former pensions minister

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Thinking first about the value of the state pension, the full flat rate is £179.60 per week, currently payable at age 66. We don’t know the future of the ‘triple lock’ on pensions indexation, but the law requires the pension to rise at least in line with earnings (except in the aftermath of Pandemics).  

If having a state pension is like having an annuity from age 66 which pays £179.60 per week, rising at 3% per year, then that’s worth over £300,000 at current annuity rates. And, given that most people reach pension age as part of a couple, you can double that number and see that for a typical at-retirement client, they and their spouse are potentially sitting on over £600,000 in state pension rights between them. Viewed through that lens, it’s worth making sure state pension payments are correct and any opportunity to boost them is considered. 

Missed opportunities 

Unfortunately, I have come across cases where advisers have let their clients down when it comes to the state pension. 

In one case both members of a couple were clients of the adviser and the wife was on an exceptionally low pension. The adviser failed to point out that the wife could have been getting a pension of over £4,000 per year based on her husband’s contributions and that this could have been backdated for over a decade.  If the husband hadn’t spotted media coverage and taken action, this lady would still be on a pittance while the adviser concentrated on more ‘mainstream’ topics. 

If having a state pension is like having an annuity from age 66 which pays £179.60 per week, rising at 3% per year, then that’s worth over £300,000 at current annuity rates.

Another messy area is state pensions and divorce.  For those reaching pension age since 6th April 2016 (and coming under the new state pension) there is virtually no provision for those who divorce to benefit from the contributions of an ex spouse or civil partner.  But those who come under the old system can benefit considerably.   

For example, women who are divorced when they reach pension age could use their ex husband’s NI record up to the date of the divorce.  Those who divorce post retirement (so-called ‘silver splitters’), have to notify DWP of their change of circumstances.  But if they do so, they can then use their ex husband’s entire NI record and will often get a big uplift if they came under the old state pension system.  Although it can take some perseverance to get the DWP to look at these things properly, the rewards can be huge, and a good adviser should be on the case. 

A £1bn issue 

In terms of checking state pensions more generally, we have recently uncovered the fact that around 135,000 people – mostly older women – have been underpaid state pensions and are owed lump sum repayments totalling around £1bn. In many cases this was because DWP failed to adjust pension entitlement either when their husband retired, when they were widowed or when they turned 80.  I wonder how many of these 135,000 had financial advisers who simply assumed – as did the women themselves – that DWP would simply pay the right amount and accepted it without question? 

I have come across cases where advisers have let their clients down when it comes to the state pension. 

Finally, on a more positive note, the state pension also offers real potential for a cost effective boost to regular income for clients. In particular, recent retirees (and those coming up to pension age) who are short of the full flat rate but who have recent gaps in their NI record can fill those gaps at ‘knock-down’ prices.   

Whilst the state pension is messy and complex, and hardly the most glamorous area of financial planning, getting it right must surely be a core duty of any financial adviser. 

Steve Webb is a partner at LCP and former pensions minister 

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