View more on these topics

Hold fire on pensions

I have just been made redundant and social security want to know what pensions I can expect before it pays me any form of credit. I only have a few small pensions, not worth much, should I take them?

With the new pension simplification legislation, it is easy to assume that all pensions are the same. You build up a fund, you take a quarter of that fund as cash and the rest of the money is used to provide an income.

This is now available to anyone over 50 and 55 from 2010. This will be true for new personal pensions but we must not forget all the rules and policy conditions of your old policies because sometimes they can have extremely valuable terms and conditions.

You have four different accounts, two with Scottish Equitable and two with Royal London. At first appearances, these are nothing other than individual arrangements with a total value of a little over 60,000. Under normal circumstances, this would provide you with tax-free cash payment of a little under 6,000 and a pension of around 100 a month. However, there are some interesting statements in the papers provided and it would be very easy to make a big mistake, which would cost you dearly.

Your Scottish Equitable policy is what is known as a section 32 buyout bond. In the past, you were a member of a final-salary contracted-out pension scheme, the value of which was transferred to this individual arrangement in your name being a section 32 buyout bond, you have what Scottish Equitable calls a reserve fund and a non-reserve fund.

It is quoting a non-reserved fund value of 27,000 plus from reserved funds a guaranteed minimum pension of 653a year. This dramatically hides the benefit that is available to you. You have the ability to take a quarter of the total value of your fund as cash, with the remainder of your money being used to provide an income. However, the section 32 buyout with Scottish Equitable has within it significant guarantees whereby Scottish Equitable promises the Government that it will always pay you a guaranteed minimum pension which is roughly equivalent to the pension you gave up in the past for contracting out of Serps. This pension of 653 a year was actually the guaranteed minimum pension nearly 20 years ago.

It has built into it a revaluation basis of 7.5 per cent a year, meaning that at age 65 it will have a value to you of 2,235 a year. This is irrespective of the value of your fund as it is a promise made by Scottish Equitable.

Under no circumstances should you trigger your guaranteed minimum pension before age 65 otherwise you will lose out. Interestingly and unusually, Scottish Equitable offers you the ability to access your unreserved fund today if you wish.

Your two Royal London policies on the face of it look exactly the same, both being called personal pension plans and both taken out under the post-1989 legislation. One has a fund value of 9,000, the other 3,000. It is only when we look through the figures that we can identify that the bigger one has a guaranteed annuity rate within it payable at your normal retirement date.

The smaller policy has no particular benefits over a normal personal pension plan offering you a quarter of the fund as cash and the rest of the money being used to generate income at the best rate available on the open market.

However, if you were to take the same action with the bigger policy, you would again lose the significant benefits. At your normal retirement date, you have a guaranteed annuity rate of over 10 per cent.

Today, the normal rate is a little over 6 per cent. This means to you that your 9,000 policy is really worth to you a figure nearer 16,000. Again, this policy should not be touched until normal retirement date.

It is very right that at this difficult time that you are looking to identify what benefits are available to you and certainly the Government, before paying any means-tested benefits, wants to know whether you are eligible for other pension benefits.

I will, however, provide you with a letter confirming what pension funds you hold and how much of those funds you could access now. I will also make it clear that under no circumstances should you touch the majority of your pensions until a later age because to do so beforehand would be significantly against your interests. This advice would be the same, regardless of your circumstances.

Richard Jacobs is managing director of Richard Jacobs Pensions & Trustee Services


This week in Life and Protection

It was all about Norwich Union last week after the parent group Aviva announced it was cutting 4,000 jobs which came hot on the heels of the news that NU was withdrawing from the long-term care market.

Stubborn Asp is baffling advisers

The Asp mess continues to get messier. IFAs can do the bidding of the Treasury and avoid being called nasty tax-avoidance advisers by not recommending Asps.

Regeneration gap

If you ask any industry professional, what are the major difficulties their profession will face over the coming 20 years, you will get a whole host of answers depending on their own personal view.

Defaqto plugs hole in system

Defaqto has denied claims that a flaw in its security system allowed users to access the AequosEngage and Aequos Online accounts of other firms’ administrators. AequosEngage launched in May and a list of master passwords and user names of all AequosEngage and Aequos Online customers was available to users in an unencrypted format until the […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm