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Retirement Solutions brief: Means times

Our panel look at how to advise on means-testing and cash inducements to leave final-salary schemes.

The Panel

Tom McPhail – head of pension research, Hargreaves Lansdown.
Bob Perkins – technical manager, Origen Financial Services.
Ian Naismith – head of pension market development, Scottish Widows.

With conflicting messages coming from the FSA and the Department for Work and Pensions over means-testing, is it possible for IFAs to give any sort of advice on pensions when means-testing may be an issue?


It is very difficult. IFAs can give advice but they need to be careful. Realistically, IFAs are not going to be doing a lot of one-to-one advisory work with pensioncredit claimants – this is not natural IFA territory.

The big challenge is on the group pension communications, where clarity and simplicity are essential. Here, any advice is going to have to be hedged with so many explanations, caveats and disclaimers that the advice will probably be relatively meaningless.

Perkins: IFAs need to be very aware of the issue of meanstesting and what that means to investors and savers generally, not just pension investors.

It is most likely that the clients that IFAs will be dealing with will be those for whom means-testing is not an issue as their personal wealth puts them above that bracket. However, where, for example, advice is being given to, say, low-earning employees in a company as to whether or not to join a group scheme, it becomes more difficult.

When the national pension savings scheme comes into effect, advisers will also have to consider whether or not individuals should opt out unless the question of means-testing is reassessed.

Naismith: IFAs cannot duck the issue with clients, and published FSA guidelines must be given more weight than verbal comments by a DWP official.

Any IFA who failed to point out the potential effects of means-testing would be regarded as negligent if there was a complaint. However, in practice, there are likely to be relatively few people who would be best advised not to save, especially as many will already have assets that would affect means-tested benefits.

For many, though, it will be better to save in an Isa if they are approaching retirement with no savings. That leaves the money available, if needed, and there is still the flexibility to move it to a pension very soon before retirement if that is beneficial.

Is there a risk of misselling claims against advisers if the Government changes or even gets rid of means-testing in the future?


The risk exists but IFAs should be getting used to living with the sword of Damocles suspended over their heads by now. Just being an IFA is hazardous. There is the risk that a future Government could move the goalposts – in fact, on past form it is almost a racing certainty. I think the safest strategy is probably to make clear to clients which bits of advice are based on reliable facts, and which are based on unreliable, or Government policy, facts.

Perkins: Advisers cannot be expected to see what Governments may or may not do in the future. However, there may be plenty of good reasons why means-testing may be less relevant to some individuals than others.

For example, a low-paid worker who is close to retirement now, say within five to 10 years and who has no savings or private pension arrangements may need to consider carefully the benefits of starting to save at this stage as he/she may well benefit from pension credit.

Those with longer to go to retirement need to be considered on their own merits because who knows what the state will be providing in the future?

Since advisers can only comment on things as they know them to be, it is important for them not to have a one size fits all approach to the question of savings and investment but to look at each case individually.

Naismith: Advisers can only give advice based on legislation in force or expected at the time. We are in a position where the Government has announced its long-term plans for means-testing and the Conservative party broadly supports them.

A significant change in the foreseeable future therefore seems unlikely and as long as the possibility of a change at some stage is made clear to the client, there should be no significant risk to the IFA.

Is it going to be possible for the Government to provide generic advice on pensions when there is something as complex as means-testing involved?


As the framework stands, probably not. The failure to address head-on the distorting effects of the pension credit is following the Government around as it tries to work out its policy. Rather than try to deal with the problem, the Government is using generic advice as the policy equivalent of an air-freshener. Unfortunately, the Government has never been very good at this kind of thing and I have little expectation that it will be successful this time around.

Perkins: As we know, there is a very thin line between generic advice and specific advice but the Government is determined that individuals should be able to make their own judgement in relation to pensions once they have all of the information to hand.

The success or otherwise of the plan will depend on the quality of the advisers and the ease by which information is communicated.

The problem with generic advice is not necessarily in the delivery but in the questions that it gives rise to in an individual’s mind. Many of those questions require specific answers and advice which then serves to blur the lines.

Naismith: It is a big challenge and, in practice, many people may need individual advice. A lot could depend on whether there is an upper-age limit for auto-enrolment.

In the long term, most employees will be pulled clear of means-testing through a combination of the basic state pension and the state second pension.

There are therefore relatively few concerns about means-testing for younger employees but those close to retirement are much more likely to be affected and there is a strong case for not including them automatically. Those considering opting in would then need more detailed guidance and it might be possible to develop internet-based planners to help with this.

Fidelity warned last month that employers are knowingly under-contributing to defined-contribution pension schemes. How serious a problem is this for DC or group personal pension schemes?


Contributions to pensions are declining generally. The Government, employers and individuals are all responsible for this.

From the employees’ point of view, the more help they get with their pension funding from their employer, the better. We are still working through a fundamental shift in the role which pensions play in employee remuneration.

Perkins: One major reason why there has been a move away from DB to DC schemes is that employers want to have some control over the future costs of their pension benefits that they provide for their employees.

To say that many are knowingly under-contributing may be true, especially if they have run DB schemes in the past, but there is also an issue of affordability which employees can do little to dispute.

The biggest problem with under-contributing is managing the expectations of the employees at retirement. This comes down to communication with staff, so they know the parts that they and their employers play in providing a decent level of benefit at retirement.

A significant question arises over the future funding of DC schemes where some employers who are making good levels of contribution might consider “levelling down” to match the contributions under NPSS.

Naismith: Typically, DC contribution levels are significantly below those for DB schemes, which suggests that the resulting pensions are likely to be lower than many will hope for.

Scottish Widows’ research last year found that average total contributions to DC pensions by employers and staff are 10 per cent of earnings while for DB they could be double that. However, most employers these days would not see it as their responsibility to provide fully for their employees’ retirement and the major concerns must be over those employers who make no contribution at all towards pensions.

Last month, The Pensions Regulator, the FSA and the DWP issued announcements on people transferring out of final-salary pensions, particularly when there are inducements on offer. Should IFAs be issuing any advice on this contentious area?


People still need advice on DB transfers, whether there is an inducement on offer or not. I think that the recent warnings from the regulator and the change in the tax treatment will probably cause the inducements to dry up and this is no bad thing. It is also fair to say though that, just very occasionally, there will be someone for whom such a deal will make sense.

Perkins: Regulated transfers are very complicated and there are a number of things that need to be considered before any decisions are taken. IFAs who advise on transfers will be familiar with these and they should also be aware of the latest position. Clients and IFAs should not focus on the inducements but on the value of the benefits that have to be given up to benefit from them.

Naismith: IFAs should be cautious about such advice, especially where the inducements are cash in hand rather than an enhancement to the transfer value.

However, if they refuse to give advice, we will see many people making wrong decisions based on incorrect or inadequate information. It is possible for such transfers to be a good deal for individuals, and they need professional help so that they can understand the issues involved.

The Government is proposing to reduce the length of time that women need to pay National Insurance to be eligible for a state pension from 39 years to 30 years. Will this make any difference to the level of pension that women get in retirement?


Overall, yes it probably will and it is one of the more attractive aspects of the Pensions Bill bodging its way through Parliament. Mind you, given the monkeying around going on with S2P, it is not unreasonable to expect some give, after all this take, take, take.

Perkins: It will certainly make a difference to the level of state pension that they receive relative to what men get, which is part of the Government’s plans.

But overall, women will tend to have lower retirement income than men for a variety of reasons. For example, more women in lower-paid jobs, fewer final-salary schemes offering good widow’s benefits, more marriage break-ups, higher dependency on money-purchase plans to provide retirement benefits, investment market conditions and so on.

Naismith: Yes, many women will be much better off following the reforms. The package being proposed by the Government will significantly reduce the gap in retirement income between men and women.


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