Are Defined Benefit Pension Funds Disappearing?

CarrilionAlthough this could be a sore subject for many of those reading, the article below and ones like it are important to pay attention to with shifts in the pensions environment.

Below you will find an article released on 14/01/18 by Geoff Ho on express.co.uk. In the 24 hours since this article was released, Carillion has now gone into liquidation putting thousands of jobs at risk and needing £300M of short-term funding. As Carillion is carrying a pensions deficit of roughly £580M this could be very worrying for retired Carillion workers, although, their pensions will be protected by the Pensions Protection Fund (PPF) acting as a pensions “lifeboat” to ensure all pensions are paid out in accordance with its normal rules.

Defined benefit pension funds are at risk of disappearing says Geoff Ho

Pension Protection FundEmployer-sponsored defined benefit pension funds have been struggling under enormous financial pressures for years and the day is coming when there will be none left in the private sector.

The Government’s Pension Protection Fund (PPF) is on standby in case it needs to rescue the 13 UK defined benefit (DB) pension schemes operated by Carillion, the outsourcing and construction group that is fighting for its survival.

Even if Carillion escapes the fate of the Toys R Us, Palmer & Harvey and Monarch Airlines schemes, others will follow soon enough.

Over the last 20 years a toxic combination of low interest rates, stock market crashes, accounting rule changes, Government tax raids (see Mr G Brown) and people living longer have fatally undermined the DB pensions system’s finances.

Even though stock markets have been on an extended bull run, low interest rates have sent pension fund liabilities rocketing.

Rates have started to rise, but it is too late as firms are no longer willing to shoulder the burden of running a DB scheme.

No company formed in recent years offers one.

The private sector DB schemes that have surpluses will eventually end up being sold to insurers, while the underfunded ones will wind up with the PPF.

It will not happen tomorrow, but the sun is setting on the golden era of workers’ pensions and only schemes that expose members completely to the stock market, called defined contribution funds, will remain.

Article source.

*Please note that this article does not necessarily reflect Capital Wealth Partners (CWP) view on the current DB Pensions situation and CWP does not encourage anyone to move away from a DB Pension where it may not be suitable.

What is the pension lifetime allowance and what changes were made in Budget 2017?

Lifetime AllowanceThe Budget 2017 did not cut the pension lifetime allowance as feared. But what is the pension lifetime allowance?

The pension lifetime allowance (LTA) is the overall amount of pension savings that you can have at retirement without incurring tax charges.

The Pensions Advisory Service says: “The Lifetime Allowance is a limit on the amount of pension benefit that can be drawn from pension schemes – whether lump sums or retirement income – and can be paid without triggering an extra tax charge.”

The lifetime allowance has stood at £1million since April 2016 when it was reduced from £1.25million. It is now scheduled to rise by £30,000 in April 2018.

The Budget said: “The lifetime allowance for pension savings will increase in line with CPI, rising to £1,030,000 for 2018-19.”

An increase in Consumer price index (CPI) is linked to the base rate or the LTA. So an increase in the CPI will lead to a hike in the LTA limit.

Ahead of the Budget, Investec warned that the Chancellor could reduce the lifetime pension allowance “so more pension benefits incur an extra tax charge”.

But this did not happen and there was very little on pensions in the Budget speech given in the House of Commons earlier today.

Mark Henderson, senior partner at online investment site True Potential Investor, said: “It’s hard to remember a Budget for over decade where pensions got fewer mentions…

“That is a relief to pension savers who have lost count of the number of changes to pensions over recent years.

“Slashing annual allowances must have been tempting against lower growth figures and pressure to spend on infrastructure, but we are pleased that the Budget offers a period of calm and stability for pensions.”

Mr Hammond did not reduce the pension annual allowance, which currently stands at £40,000. If your ‘adjusted income’ is more than £150,000, your annual allowance is tapered down.

The Pensions Advisory Service says: “While most people aren’t affected by the lifetime allowance, you should take action if the value of your pension benefits is approaching, or above, the lifetime allowance.

“As pensions are normally a long term commitment, what might  appear modest today could exceed the lifetime allowance by the time you want to take your benefits.

“It may be necessary to take your pension early or stop contributing to the scheme/plan, even though you have not retired, to avoid your benefits exceeding the lifetime allowance.

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Watchdog says you CAN move your final salary pension even if advisers say no

Retirement:Pension BindersSavers told by financial advisers that they cannot transfer their “final salary” pensions – even if they are fully aware of the risks – have been granted unexpected support by the City watchdog and Treasury.

Under Government rules you must seek financial advice if transferring a final salary pension, also known as “defined benefit” pension, where the entitlements are valued at £30,000 or more.

Transfers have grown in popularity because moving money into “defined contribution” schemes (the more common pension arrangement) allows greater choice over how to make withdrawals from pension pots. The ability to dodge inheritance tax is another benefit of the latter schemes, as reported here last week.

But savers have found advisers unwilling to help them transfer if they deem it not to be in their best interests.

Now the Financial Conduct Authority – which oversees financial advisers – has issued new guidance for advisers confirming that they should help what the industry has dubbed “insistent clients”. These are people who want to pursue something irrespective of advice not to do so.

The move follows another supportive paper, published in June, laying out similar guidance to advisers suggesting they should make it easier for savers seeking to move their money.

Many people are advised against the move because their final salary plans pay generous, guaranteed incomes rising with inflation. This is difficult to value, as the ultimate benefit will depend on how long the retiree lives.

As a result advisers are extremely cautious about recommending a transfer.

But the FCA’s guidance should help savers struggling to complete a transfer.

The watchdog reiterated that “where a client has received a personal recommendation they may choose to take a different action to the one that was recommended”.

It set out guidance for advisers to follow when helping people who want to act against their wishes, including requiring savers to state in their own words that they understand the implications of going against advice.

Richard Freeman, of Old Mutual Wealth, a provider of pensions and financial advice, said the guidance helped ease the “catch-22 situation”.

He said: “Common sense seems to have prevailed. As long as the original advice meets normal regulatory requirements, and the drawbacks of pursuing an alternative path are made clear, advisers can still support insistent clients.”

According to recent estimates around 210,000 people have moved money from final salary schemes over the last two years. At least £50bn of pension money is thought to left schemes as a result, but that still leaves well over £1 trillion of assets held by British final salary funds.

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A “fundamental” shake-up of pensions tax relief was ruled out by the government

David Gauke MP at 'Tax and British Business'A “fundamental” shake-up of pensions tax relief was ruled out by the government this week, but experts are warning pension savers to expect more “slicing and dicing” of lifetime and annual allowances instead.

Major changes — which would likely have seen tax relief on contributions scrapped for higher earners — have been ruled out by the government for the time being.

Tax relief on pension contributions is currently pegged to the savers’ marginal rate of income tax. So top-rate taxpayers receive 45 per cent tax relief on their contributions, higher earners receive 40 per cent, and basic rate payers 20 per cent. Even non-taxpayers are entitled to claim basic rate relief on contributions.

David Gauke, the newly installed secretary of state for work and pensions, said this week that said he didn’t see “a particular consensus emerging” for an overhaul of retirement savings incentives.

“I wouldn’t see any fundamental changes in the near future,” said Mr Gauke, who moved to the DWP from Treasury, where he held various ministerial roles for seven years.

“The idea of reforming pensions tax relief in the previous parliament was somewhat daunting and recent events haven’t changed that.”

However, Mr Gauke indicated that major reforms were not completely off the table.

He was a minister in Treasury 2015 when former chancellor George Osborne floated radical proposals which could have resulted in the loss of upfront pensions tax relief for higher earners in an attempt to reduce the £21bn annual cost of tax relief for individual savers.

“I am not going to shy away from the fact that getting legislation through the House of Commons would challenging now,” Mr Gauke said on Wednesday, referring to the government’s weak majority.

“But that does give us an opportunity to now think about long-term reform, and to try and build a consensus.”

Pension experts said the government was now more likely to continue to “tinkering” with the lifetime and annual savings allowances, which govern how much can be saved into a pension and benefit from tax relief.

Since 2006, there have been more than a dozen changes to the lifetime and annual allowances which have been whittled down to to £1m and £40,000 respectively.

Calls for reform have been partly driven by concerns that the current system is not effective in encouraging savings among lower earners, as the lion’s share of tax relief is currently paid to the better off.

“David Gauke chose his words very carefully when he ruled out ‘fundamental’ changes to tax relief,” said Kate Smith, head of pensions with Aegon, the pension provider. “What this statement does not rule out is further slicing and dicing of the annual and lifetime allowances — which could be at risk again.”

Patrick Connolly, certified financial planner, with Chase de Vere, added: While it might prove difficult to get through legislation on fundamental changes to tax relief, it could be much easier to get cross party support to pass legislation which is perceived to impact only one wealthier pension savers, such as further cuts to the annual allowance or lifetime allowance.”

Ms Smith said a further reduction in the lifetime allowance to less than £1m would be “absolutely detrimental to pensions”.

“It would cause major complications for defined benefit pension schemes — which would include many public servants — due to the issues with calculating the allowance,” she said.

Such tinkering would stop short of the radical pensions reforms discussed in 2015, which included a switch to one “flat-rate” of tax relief for pension savers, regardless of their income tax band. This would likely have been set at around 30 per cent.

The idea of a “Pensions Isa” was also floated, which would have abolished tax relief altogether. Instead, post-tax income saved into Isa-style accounts would have attracted a government “top up” and could be taken entirely tax-free in retirement. April’s launch of the new Lifetime Isa for savers under 40 works along the same principles.

Find out more about Lifetime Allowance and how Capital Wealth Partners can help you to make the most of your allowance here.

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