The FSA launches a probe into current pension rates

The FSA launches a probe amid concerns UK pensioners are getting a poor deal for their pension savings. 

The FSA investigation seeks to evaluate current pension rates offered to retirees when they sign up to an annuity, which provides them with a set income from their pension fund.

What constitutes an annuity?  In simple terms, it is the income you get from your pension once you retire.  The amount of income will depend on the total value of the pension you have saved up throughout your working life.   The more you have saved, the more money will be paid out on a monthly basis once you retire.

What many pensioners don’t consider is that they might be losing out by not shopping around for an annuity, a market that is worth today £11bn.  As per the open market option, retirees can take their pension pot and shop around amongst other providers for the most competitive annuity deal.

Is it worth it?  Absolutely!  This will be surprising to many pensioners who quickly assume that the difference may be insignificant on the basis that the underlying product is the same.  However, statistics show that there can be a variance of up to 20 per cent in the rates offered by different providers between the best and worst deals available on the market today.  This means that some retirees could be missing out on a substantial potential boost to their incomes.  In fact, an annuity purchase is one of the most important one-off financial decisions that you can make and the one that will have long-term consequences if you get it wrong.

The open market option was introduced back in 1988 however historically the take up has been low.  Only about 40 per cent of pensioners actively shop around before taking an annuity, with the majority directly accepting the rate offered by their current pension provider.   The FSA is looking to change this trend by compelling pension providers to disclose to customers that they have the right to compare different options available to them.

In reality, the insurers have been obliged to tell pension savers of their right to shop around since 2002, but the current probe will determine whether these firms are doing all they can to make this transparent and clear to their customers.  The regulator will be examining both the pricing of the annuities as well as the marketing and advertising involved in promoting these rates.  Furthermore, it will then check the individual providers to see whether their existing practices in fact help to encourage a person to shop around or actually make it more difficult for them to seek a more competitive option.

While this probe could have positive implications for those buying annuities in the years to come, it won’t provide much consolation for those unlucky ones who are seeking to purchase a retirement income now.  Adding salt to the wound, the cost to buy a retirement income has spiked in recent years due to measures implemented by the Bank of England in order to ease the financial crisis.  Maintaining the UK bank rate low at 0.5 per cent for almost four years and injecting some £375bn of new money into the economy via quantitative easing, had the effect of depressing the yield on gilts.  Because annuities are linked to the yield on 15-year gilts, it means pensioners get much less for their saved money.

You still get what you pay for!  About 40 per cent of retirees who do shop around, manage to get improved annuities after receiving financial advise.   Considering other options for an annuity can lift your income by a considerable margin, while for those pensioners who have particular medical conditions or lifestyle choices that may decrease their life expectancy below the average statistics, can increase potential retirement income even further by them qualifying for an enhanced annuity.

The market has indeed seen much innovation and increased choice for pensioners over the last few years, which means that many more potential options are available on the market to those who take time to look.  There are various options to consider such as lifetime annuities, those linked to investments, fixed term annuities, fixed and capped drawdown, phased retirement and many others.

We can only emphasise the importance of financial advice to ensure that your retirement planning is on the best track possible.  Think about it like buying a car insurance, you don’t take the first quote!

If you would like to receive more information about various pension-planning options available to you, please do not hesitate to get in touch.  We will be happy to be of assistance!

Gibraltar returns to the QROPS market

The HMRC has announced that “there is no HMRC objection to Gibraltar QROPS commencing or resuming the acceptance of transfers from UK registered pension schemes”. This follows a number of years of uncertainty within the QROPS market where a number of jurisdictions have had many of their QROPS registered plans removed as a consequence of them not meeting with the strict requirements laid down by the UK revenue and customs authorities.

The Gibraltar Association of Pension Fund Administrators have been working hard with both the Gibraltar Government and UK HMRC to ensure that their own QROPS pension rules meet all the requirements stipulated by the UK government. The principle amendment made to Gibraltese legislation was that Gibraltar QROPS must be taxed at a similar rate to local Gibraltar tax rates – even if the policy holder does not live in Gibraltar. Furthermore in the recently passed pension legislation they have now stipulated that all new cases can only take out a lump sum of up to 30%. Pension holders can only crystallize their pensions after reaching the age of 55 – except in the most severe of cases of incapacitation.

It is not usual for the HMRC to deliver such a categorical message of support for a QROPS jurisdiction. It is felt that this was provided because of the current uncertainty in the QROPS market caused by the removal of many previously approved schemes. From the statements issued by the Gibraltar Pension Fund Administrators and Gibraltar Government they appear to be taking a more mature approach to the jurisdictions which are taking a proactive approach to fitting in with the new HMRC guidelines.

We saw the effects on Guernsey when they weren’t willing to fit their QROPS schemes into the spirit of the QROPS regulations being decimated as a consequence.

This is all good news for Gibraltar and their faltering industry. For more information on this and any other questions you might have, please don’t hesitate to get in touch with one of our advisors below.