The government has been criticised for undue haste and lack of communication concerning new pension rules coming into effect in April 2015. However, as the date continues to creep up on us, increasingly I believe members of defined benefit (DB) schemes will be the biggest losers from the changes.
That might sound odd given that members of defined benefit or salaried, inflation-linked pension schemes are normally considered luckier than their defined contribution (DC) peers. While this is often the case, it is a fallacy that a DB members will always be better off staying in their current scheme, rather than transferring to DC, as the new legislation allows.
For many people in good health with a co-dependent spouse or partner, a DB pension can be the right solution and a very attractive one at that. But not all DB retirees fit this mould. Some could benefit from more flexibility in how they take their pension.
If you look at how people spend their money in retirement, many go through more in the first few years, buying things like holidays of a lifetime or investing in home improvement projects while they are generally more active. Then as they get older, outgoings typically decrease. Later still, they may need specialist care or to move into a care home so expenditure will rise again, probably significantly.
Additionally, while people are supposedly living longer, actuaries do sometimes over-estimate the life expectancy. What good is a traditional DB arrangement if a person is terminally ill and urgently needs more from their pension savings to pay for respite care?
My fear is that April’s legislation will discourage DB members from transferring their pension to another arrangement because the advice which would empower them to do so isn’t available right now.
In order for a DB member to take a more flexible pension arrangement, they must go through an overly complicated and expensive advice process. Its problem is that it assumes if members are not taking an annuity they will want to take a typical drawdown. However, in reality the member in question could just be after a little more cash.
This process requires some fairly complicated financial modelling that independent financial advisers (IFAs), may not be able to provide from a resource perspective and members may not be in a position to understand. Come April, schemes could find themselves inundated by member queries.
The industry has had a year to get up to speed with government’s changes. Some may feel that is enough time, others will not. Regardless, the amount of tailored material or support for defined benefit scheme members has been inadequate thus far.
Of course, DB members should take advice before transferring to a new pension arrangement, as changing from DB to DC will not be risk-free. However, the advice from IFAs must be fit for purpose and clearly articulated. After all, anyone who has saved for a pension has the right to spend it how they wish. Gaining this basic entitlement is evidently not as easy as it should be for DB members. That is wrong.
This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.