RegulationSep 13 2017

Early bird gets the worm

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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.

For the schemes themselves ... the more people that transfer out of the DB scheme, the less risk the employer is taking on their behalf

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.

The problem we have is that there is no such thing as 20/20 foresight, sadly, so which decision would have been the best at the time can only be measured in hindsight, and when you are advising the client you can only lay out the best and worst case scenarios to help them make a decision.

No matter what happens in terms of advice though, the chances are that people potentially seeing these telephone number valuations on their annual pension statements will be encouraged to take action to ‘get at’ that money sooner rather than later. It is human nature for lots of people to live for the moment rather than worry about the future, and that instinct is even more acute if you have just seen your neighbour access a big chunk of money much sooner than you could. It is the basic 'fomo' in social media parlance – or fear of missing out.

For the schemes themselves, this is essentially a godsend as the more people that transfer out of the DB scheme, the less risk the employer is taking on their behalf, so if they have the choice they are likely to make it as easy as possible for pension scheme members to see what their transfer values are.

DB transfers are already rising thanks to the pension freedoms rules – with Xafinity data showing a 166 per cent rise in transfers in the first quarter of this year compared with 2016 – and this additional visual cue for scheme members to take action is only going to push this phenomenon further and faster.

But it is vital that people understand the importance of taking financial advice before they make their decisions, and we can only hope that alongside any changes of this nature, the government will bear this in mind, and promote advisers as the best source of information.

Alison Steed is a freelance journalist