Pension Updates on the 2nd Quarter of 2020
It’s certainly been very much about pensions with Brexit looming, along with additional factors that could quite possibly impact many people with UK based assets. Most pensions that are well invested and managed, should by now, have made it back to pre-Covid levels.
Clients that are in different risk categories are now taking steps amid a period of stabilisation. Clients up to the age of 50 are moving to more aggressive investments that are based in technology and green investments, as in the medium to long term the outlook is likely to give some really impressive growth based on the market position. Many of our clients who are due to retire within the next 5 – 7 years are looking at a more balanced investment strategy, while clients due to retire much sooner are moving money into a defensive position and liquidating selected assets.
The key is knowing how your money is performing by receiving input as to what is the best strategy for you to take right now. There are certainly opportunities available to take advantage of, but there’s also a lot of factors to consider before investing at the moment. The safest forms of investment are still well diversified and actively managed funds.
Brexit and Likely Changes to Pension Reform
As an EU member with free movement of people, this also means free movement of pensions inside the European Economic area. We don’t know for certain what the implications of the UK leaving the EU will be on pension transfers, but we can make some educated assumptions based on the data so far.
Firstly, HMRC are unlikely to want to lose the tax revenue on pensions if it doesn’t have to. The HMRC have let this money grow tax free and will therefore want their ‘tax income’ when it comes to drawing or moving the money. This is evident in regard to Switzerland, who are of course in Europe but not an EU member and tax efficient pensions are charged at 25% of the value for transfer. We believe this is the likely outcome but will remain part of the negotiations throughout 2020. If this were to come into force, it could happen during a budget with no announcement like the changes to pension contributions in the last budget, delivered by Rishi Sunak.
It would be advisable to place yourself in a good position in order to plan before the end of 2020 is upon us, and by exploring the benefits that are relevant to you. It could make more sense to leave your investments where they are, which is something we may advise. Retrospectively, it could also prove difficult to investigate this after pension reforms are made by the UK.
Defined Benefit / Final Salary Pensions
Final salary pensions are described as a ticking time bomb for companies in the UK, as the schemes are just impossible to administer. It’s a cocktail of people living longer, people in a position to be able to retire at 55, Government bonds and Gilt rates are low – meaning growth is difficult and inflation is tracking around 2%.
The UK is thought to stand at about £300 Billion in deficit, meaning companies have to somehow make up this shortfall. Most final salary schemes stopped in the late 90’s to early 00’s favoring the Defined Contribution Scheme where the employee and employer contribute to the scheme as people earn. There is protection set up by the Government called the Pension Protection Fund, but this means reduced earnings in retirement for a lot of people. Recent members are, Thomas Cook and Carillion, but the fund stands at a massive £32 Billion with 250,000 members not receiving their full benefit promised by their employer. And now, we are also seeing a large rise in inquiries from Aviation and Oil industry professionals trying to secure their assets.
Defined Benefit / Final Salary Pension Transfer Values at all time High
So, a final salary pension is normally calculated in the following way. Please note the following is an example only.
E.G – (Amount of years worked) 15 X £50,000 (best Salary in last 5 years of employment)/60 (this is the accrual rate for a lot of schemes) = £12,500. This is the amount per annum you would receive in retirement without considering the age you retire (reduction for the earlier you do) or Inflation at around 2%.
As people are living longer (82 years on average) and can retire at 55, the valuation placed on this type of pension is at an all-time high. We have seen valuations of up to 40 X the annual salary as a transfer value, so in this example that would mean a Cash Equivalent Transfer Value (CETV) of around £500,000. What we are finding is, people want to have control over and access to 25% of this pot at age 55. Also, members of these schemes tend to prefer 100% of this money being available to the chosen beneficiaries (spouse or children) as opposed to most schemes’ death benefit of 50%, which leaves your loved ones vulnerable. Additionally, growth of around 2% isn’t the best that’s possible on the market right now with many cautious and balanced portfolios achieving in excess of 4% per annum.
Information is key and exploring your options so you can make an informed decision based on facts is vital to safeguard your retirement – and your family’s future.