Early bird gets the worm

Communicating with customers about their finances is key to helping them understand what they have and, just as importantly, what they can do with their money to improve their lot.

But there is a danger in communicating with customers who have little or no financial savvy, in that they could be tempted to make a decision about their financial affairs without knowing all the facts.

No matter which area of your personal finances you look at, making a snap decision based on one piece of information has a real chance of impacting in another area that you simply had not expected.

For example, buying a mobile phone might seem pretty innocuous, but many people do not realise that this actually involves a credit check if you are taking out a contract, and that check could have an impact on whether or not you are granted a credit card in future, or a car loan, or a mortgage.

So, the news that defined benefit pension scheme members are to receive annual notification of their benefits value under new EU regulations could be a little concerning, especially if people are making decisions about moving away from their DB schemes to defined contribution (DC) schemes without taking the proper advice.

The new rules, reported in Financial Adviser on 6 September, are part of the Occupational Retirement Provision Directive (IORP II), and need to be implemented in the UK before 13 January 2019, just over two months before we hit the Brexit deadline for the UK leaving the European Union.

Now, being told that you have a chunk of money waiting for you sometime in the future – let’s say the DB scheme allows you to retire at 65 and you will get all of the commensurate benefits and guaranteed pension income that this provides – will be too much temptation for some. There is, of course, the chance to move that money to a DC scheme in the meantime and you will have much more flexibility about how you can deal with it, such as retiring at 55 instead.

However, the downside is that the guaranteed income – perhaps two-thirds of your final salary – will no longer apply, and the amount you will receive will be left to the way the markets perform between the time you move the money and the date you choose to retire.

Yet this poses a brilliant opportunity for advisers with the right qualifications to help those receiving these letters understand exactly what it is they are seeing, and the pros and cons of the various actions they could take on the back of them. While moving the money out of the DB scheme may seem risky on the one hand, as you are relinquishing the possibility of having a ‘higher’ payment in retirement – of course there is no guarantee of that – there is always the chance that the DB scheme will change its rules. Or, if the company goes bust, it could end up in the Pension Protection Fund, which will significantly reduce any benefits you might receive.