Transferred out of a DB pension? Don’t rest on your laurels
Between 1 April 2017 and 31 March 2018, around 100,000 people transferred their ‘gold-plated’ DB pension schemes into DC schemes which promise greater flexibilities. See YourMoney.com’s Five reasons to transfer your DB pension (and five not to) for more information.
Such a move is a major decision; it can be a complex process and for those with benefits worth £30,000 or more, it’s a requirement that you seek financial advice for the transfer.
But for others who may have made the transfer without advice or are no longer taking ongoing advice about the funds post-move, it’s important to remember your financial responsibilities don’t end there.
Below are three tasks and decisions to take note of – if you haven’t already – to make the most of your new pension arrangement:
In a DB scheme, you don’t have to make any investment decisions. But once you transfer to a DC scheme, probably a type of personal pension such as a self-invested personal pension (SIPP), it is your responsibility to invest the pension funds.
Gains and losses now directly affect the value of the pension and therefore the benefits which may be available at retirement, so it’s crucial to take this into account. Remember that an investment strategy will be an ongoing process, so even if a now estranged adviser set up initial investments these will still need to be reviewed regularly.
Depending on the type of pension, there may be a relatively limited choice of investments, or the individual may have access to just about any investment allowable within a pension under HMRC’s rules. You will need to check with your new pension provider what options are available. It may also be possible to hold assets with an investment firm which is authorised to help with the ongoing management of the investments.
Regulator, the Financial Conduct Authority (FCA) has recently confirmed that one of its main concerns with the pension freedoms is unadvised consumers not getting the most out of their pensions due to poor investment decisions. We strongly recommend you seek help with choosing and managing the investments within your pension.
Death benefits in DC schemes became much more flexible and tax-efficient when a set of changes called the ‘pension freedoms’ came into force in April 2015. People who took advice regarding their DB transfer may already have had this highlighted to them as a key feature of DC schemes.
However, the full flexibility possible won’t automatically be available. In order for the preferred beneficiaries to be chosen by the scheme administrator, and for those beneficiaries to have all options available to them, you must make sure you complete an ‘expression of wishes’. This is simply a form or letter which tells your scheme administrator who you would like to inherit your pension upon death.
Advisers will normally recommend the expression of wish form is completed when opening a new pension, but sometimes people put off the decision; for example, because their personal circumstances are in transition at the time. Where this is the case, it’s all too easy to forget to go back and complete once things have settled down.
An important reason to complete the form is because beneficiaries’ drawdown – which is often the most flexible and tax-efficient option – won’t always be available to beneficiaries if they’re not named on an expression of wishes.
It’s also vital to keep it up-to-date as circumstances change. It’s often also worthwhile to make sure the expression of wishes can cater for unforeseen circumstances, such as a beneficiary dying at the same time as the individual. For example, this might involve naming an alternative beneficiary to be considered if the first can’t, or doesn’t want to, receive the death benefits. Some pension providers will have forms which accommodate such requests; others will be able to accept signed letters to that effect.
Lifetime allowance protection
Many people began to consider DB transfers because of the high transfer values available. An unwelcome consequence of this, however, is that many people are now at risk of breaching the lifetime allowance when they access their pension benefits.
The lifetime allowance is the maximum value of pension benefits a person can access before paying a charge on the excess. The standard lifetime allowance for the 2018/19 tax year is £1.03m. It has just started to rise in line with inflation each year, but before that it had been dropping for several years. The good news is that it’s still possible to apply for two different forms of protection which give you a higher lifetime allowance entitlement.
Fixed protection 2016 gives people a lifetime allowance of £1.25m. It’s available to those who have not accrued any new pension benefits since before 6 April 2016 (your provider will be able to confirm if this is the case). You also may not be eligible if you already hold an older form of lifetime allowance protection which gives a higher level of protection.
Individual protection 2016 is available to those whose pension funds were worth more than £1m on 5 April 2016, but not to anyone who already holds primary protection or individual protection 2014.
There is a set method for valuing pensions for this purpose, and it also includes pensions which have already been accessed. Pension firms will be able to provide the valuations required to apply for individual protection 2016.
This form of protection gives a lifetime allowance based on the value of a person’s pensions on 5 April 2016, up to a maximum of £1.25m. However, because this form of protection relies on a valuation at a specific date, it may not help those who have recently transferred from a DB scheme unless they were already going to breach the lifetime allowance.
Jessica List is pension technical manager at Curtis Banks