Article:  Aegon launches new guaranteed option | Publication: MoneyMarketing | Date: 22 July 2010| Author: Nicola Blackmore | Quoted: David Trenner

Aegon has launched a new guaranteed income option which secures an income of 5 per cent of the original investment for 20 years.

Its previous five for life product offered 5 per cent guaranteed income for life from age 60 but was withdrawn in June 2009 due to market conditions.

Under the new guarantee on the company’s investment control bond, if the value of the bond grows beyond the original investment, this is locked in annually on the bond’s anniversary and returned to the client at the end of the term.

The secure income option allows clients to cover their own life and up to three other people by offering an inheritance benefit of the highest of 100.1 per cent of the cash-in value, the original investment less any income taken, or the highest recorded fund value, recorded on the anniversary, less any income taken. The maximum exposure is 50 per cent, which attracts a 1.2 per cent guarantee charge.

Hargreaves Lansdown pensions analyst Laith Khalaf says: “Five for life proved too costly so what we have here is five for 20. I think most clients will find the promise of their initial investment back over a period of 20 years underwhelming.”

Burrows & Cummins partner Billy Burrows says: “It is good to see a product offering 5 per cent at a time when we have low interest rates but I would rather see income growth than a lump sum at the end of the term.”

Intelligent Pensions technical director David Trenner says: “This new product is only really guaranteeing to return the original capital over 20 years – (20 x 5 per cent = 100 per cent), which for an investment of up to £50,000 could be achieved by putting the money in a bank account.”

Trenner adds: “For a cautious investor with 20 or more years to invest I think I would stick with the bank account, which has no smoke, no mirrors, yet still offers the same guarantee as Aegon. 

“For someone less cautious and with 20 or more years to invest I would be looking for something which offered the prospect of a real return without paying for the guarantees.”

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Article: An Age Old Dilemma | Publication: Investment Life & Pensions (Moneyfacts) | Date: July 2010 – Issue 165 | Author: David Trenner

The announcement in the Emergency Budget that it would no longer be compulsory to buy an annuity or go into Alternatively Secured Pension (ASP) at age 75 was generally well received. However, financial advisers should be wary that this change does not work against them.

Firstly, there has been some confusion about the ‘interim rules’, which has caught out a number of commentators. Budget Note 22 paragraph 6 was perhaps not the cleverest piece of drafting, but Stephen Webb (the one that works for HMRC, not the minister) has confirmed what I thought: anyone who was 75 before the Budget will still be subject to the 82% tax charge on death, with the 35% rate only applying to those who reach 75 after 22 June. As Mr Webb pointed out, anyone going into ASP before the Budget knew the rules and accepted them. He also confirmed that tax free cash must be taken at 75, and cannot be deferred to 77.

Click here to see the article in full

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Article:  A clever annuity quote | Publication: The Money Debate | Author: John Lappin |Date: 19 July 2010 | Quoted: Steve Patterson

Sometimes journalists get criticised for simply cutting and pasting releases on to their websites. Most of the time this is lazy and you miss something by not phoning and asking questions. Sometimes though a press release offers an expert view and a quote that sums up an issue. Here is Intelligent Pensions MD Steve Patterson on the 75 reform.

“Removing the requirement to annuitise by 75 might sound like a great opportunity for advisers to keep clients in drawdown for as long as possible, but advisers need to beware. The regulatory scrutiny on the issue of when to annuitise will become even greater, especially to demonstrate appropriate risk management processes are in place with suitable ‘exit strategies’ for drawdown clients, according to their individual needs and circumstances.”

Cut, paste. Job done. Well done Steve.

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“In recent weeks there has been increasing talk of the possibility of “double-dips” in major global economies. Such scaremongering obviously impacts market sentiment and of course threatens to become a ‘self fulfilling’ prophecy, but real evidence to support such concerns is hard to find. Most fund managers are still predicting continuing gradual improvement – albeit at a much slower pace that we have seen over the last 12 months.”

Click here to see the full Investment View for July 2010

Article:  The Pension Question – Consolidating your pension plans? Make sure you do your homework | Publication: Sunday Herald | Date: 11 July 2010 | Author: Helen Pridham & Simon Bain | Quoted: David Trenner

One of the changes proposed by the new coalition Government in Westminster is the phasing out of employers’ ability to compulsorily retire employees at the age of 65.

Many people will welcome this opportunity to go on working, though they may prefer to cut down and work part-time and supplement their income by taking their pensions in stages. But if their pensions are modest, this could mean they get caught out by a rule which prevents them turning their benefits to cash if they do not complete the whole ­process within a year. This could make their small amount of pension provision even smaller.

Meanwhile, for those with bigger pots who want more control over their retirement ­prospects, deciding whether or not to opt for a self-invested personal pension (Sipp) could be a critical decision.

SMALL POTS

Many people nowadays have accumulated a variety of pensions by the time they reach retirement; Pensions that have come with jobs, or personal pensions they have set up for themselves. Sometimes these pension pots are very small due to low contributions or poor investment performance, or both.

When pension funds are small, it usually makes sense to take all the money as a lump sum. With larger pensions, only 25% of the capital value of the pension can be taken as a tax-free lump sum, while the remainder must be used to provide a regular income, either in the form of an annuity or as an unsecured pension. However, if the total pension pot is £18,000 or less, the whole lot can be taken as cash. This procedure is known as “trivial commutation”.

Taking the pension as a lump sum not only provides savers with greater ­flexibility but it can mean they qualify for larger state pension credits which they would have otherwise ­foregone by taking a small pension income.

If you do take all of your pension as a lump sum, 25% will be tax-free but the remainder will be subject to income tax. However, if you have no other income in that year apart from the state pension, your tax bill may be lower than you expect, especially if you are 65 or over and qualify for age allowance.

The real snag is where someone has more than one small pension, which together add up to less than £18,000, and they fail to commute them all within a 12-month period. It means they will lose the commutation option. David Trenner, technical director at Intelligent Pensions in Glasgow, says: “This rule was brought in to stop people abusing the triviality rule by setting up lots of small personal pensions and taking them as cash.”

But it is catching out people who have innocently decided to take their pensions more than a year apart. Trenner points out: “A major problem with small pension pots is that it becomes difficult for people to shop around for a competitive annuity rate, so not only are they getting a small pension but it may only be, say, 80% of what they could have got on the open market.”

It is always important if you have a personal pension, or similar invested scheme, to find out if you can get a better annuity rate when you reach retirement than that offered by your original pension company. Even though it may only make a £50 difference, you will continue receiving the extra money for the rest of your retirement, so it can mount up.

However, several of the larger and more competitive annuity providers, such as Canada Life and Aviva, will not sell them for less than £10,000 and, according to Trenner, if your pension fund is worth less than £5000 you won’t be able to shop around at all and will be stuck with your current pension company, no matter how bad its annuity rate is.

But ignorance may be bliss. Trenner points out that if small savers don’t take advice and are unaware of the 12-month rule – consequently taking trivial communications more than a year apart – the authorities may turn a blind eye.

BIGGER POTS

For those who have built up a number of pension pots in different employments it seems to make sense to consolidate them into one wrapper, the self-invested personal pension or Sipp, and adopt a co-ordinated investment approach.

A survey of 70 Sipp managers by Pensions Management magazine last month found the number of plans in force has risen by 25% in the past year to reach 650,000.

But the Financial Services Authority has for some time been warning that Sipps may be a danger area for mis-selling. In April, it admitted that despite its concerns there were still “high levels” of unsuitable advice, where people are being sold a Sipp when they do not need one, and where they may even lose pension benefits by switching into one.

The magazine survey found four distinct types of Sipp product. Two of them, ­full-range and mid-range Sipps, offer the investor the choice of a wide range of investments, including more esoteric and exotic assets, and will charge accordingly. The hybrid Sipp is cheaper, but it requires the investor to put a chunk of cash in the provider’s own fund – which may suit the provider more than the investor.

Richard Harwood, an adviser at Brewin Dolphin, warns that insurance companies in particular have been “quite aggressive” in trying to get new Sipp business through financial advisers – some paying attractive commissions. Charges tended to be higher, on the basis that the choice of investments was broader. Yet the managers could easily end up investing the money “in funds that weren’t significantly different to before”.

The fourth kind is the platform Sipp, which offers an account where quoted investments and cash can be managed online, at low cost and probably in a “free” pension wrapper. Hargreaves Lansdown’s Vantage Sipp has 1000 investments to choose from, while Bestinvest offers free Sipps on portfolios of at least £50,000. It also warns that some “free’”Sipps will levy other charges such as exit fees.

One pitfall here may be cash. A survey last year found major providers paying next to nothing on cash held in their Sipps, making a tidy profit from investors’ rush to cash.

But for those comfortable with a DIY pension, Sipps can deliver rewards.

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Article:  Skandia: confusion over annuities after HMRC drawdown change | Publication: Citywire – New Model Adviser | Date: 06 July 2010| Author: Will Robins | Quoted: David Trenner

Pensioners buying annuities before age 55 could still be hit with high tax charges despite HM Revenue and Custom’s removal of unauthorised payment charges for pre-55 drawdown transfers.

HMRC has removed the maximum 55% unauthorised payment charge. That charge applied to those between 50 and 55 who tried to transfer to another provider money they had taken from their pension before the minimum pension age increased from 50 to 55 on 6 April.

But Skandia pension development manager Adrian Walker (pictured) said that 40% charges would apply to to lifetime annuity purchases made from income withdrawal funds before age 55.

‘HMRC has confirmed that the draft regulations announced in that release do not cover the unauthorised payment charge that will be generated if an individual looks to purchase a lifetime annuity or scheme pension from an income withdrawal fund prior to age 55,’ said Walker.

‘In HMRC’s note last week there was no line addressing this problem. The only mention of lifetime annuities says that sums underpinning an existing lifetime annuity may be transferred, but to a new lifetime annuity.’

David Trenner, technical director at Intelligent Pensions, said it was likely HMRC would be making a further annoucement allowing annuity purchases.

‘There’s no way they would make these changes if they weren’t going to do it properly,’ said Trenner.

‘They have given four cases, transfering funds from one drawdown arrangement to another, from one annuity to another annuity and so on. I imagine that implies being able to buy an annuity with drawdown funds.’

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Article:  Addressing the crisis in public sector pensions | Publication: Citywire – New Model Adviser | Date: 28 June 2010 (06 July online) | Author: Will Robins | Quoted: David Trenner

John Hutton, the new head of the government’s Public Service Pensions Commission, has only two months to decide on credible recommendations for how to control the cost of public sector pensions.

To see the breakdown of costs and liabilities faced by the 11 public sector pension schemes, click here.

The emergency Budget said very little about the fate of public sector pensions, beyond restoring the link with the consumer price index (CPI), breaking the existing peg to the retail price index (RPI). However, the coalition has already indicated it thinks ‘gold-plated’ public sector pensions are unfair and should be levelled with flagging private provision.

Nigel Keogh, pensions technical manager at the Chartered Institute of Public Finance and Accountancy (CIPF), said the aim of the commission needed to be two-pronged.

Two core objectives

‘There are two things the commission must do: make short-term recommendations to control costs and come forward with a longer-term plan that next year’s Budget can begin to implement,’ said Keogh.

‘Commentators seem to overlook the fact that the scope of the work includes the disparity between public and private sector pensions. That is a wider problem but it cannot comment on the affordability of public sector pensions without also doing something to address the gap. There will be a hidden cost to the state if poor take-up of private pensions means people fall back on to their state pension.’

While saying little about public sector pensions, the Budget did announce a freeze on public sector pay, and the restriction on pay for high earners to no more than 20 times the lowest wage.

David Trenner, technical director at Intelligent Pensions, argued a similar restriction should apply to top-level public sector pensions.

‘There are public sector employees taking £4,000-a-year pensions while, within an organisation like the NHS, there are a lot of people on six-figure salaries drawing over £50,000 a year, which is huge,’ he said.

The funding challenge

Addressing public sector pension’s funding problem could involve either cutting payments or increasing contributions – or both.

‘Longevity is where the real problems will come and tinkering with contributions won’t help,’ said Trenner.

‘To make a difference they would need to go up to 25% of salary and I don’t think people would accept that. Otherwise, and as a result of longevity, they might have to think about reducing the benefits in line with the number of years spent working for the public sector.

‘They could also raise the retirement age to 70 and apply penalties to those who take retirement early.’

David Robbins, senior consultant at Towers Watson, agreed that requiring a rise in contributions would achieve little and said the main problem of public sector pensions was their generosity.

‘Is it sensible to increase contributions? Not really,’ he said.

‘Asking them [contributors] to pay more this year will help this year’s numbers but if they are still making the same pension promise it will do nothing in the long term.

‘The commission needs to make them less generous. A good idea would be to let people choose between pension and salary. So they would be saying to workers: pay what you pay now, and get less out of it, or if your pension is more important to you than today’s salary then find a private pension plan.’

A need for education

But independent pensions consultant Ros Altmann said that if the commission recommends a cut in payments at retirement it would cause unrest.

‘Whatever happens, the public sector won’t accept it and when cuts are made there will be industrial unrest and there will be a fight,’ said Altmann.

‘What you really need are pension experts to explain to the public what has to be done.’

Key voices on the panel

Apart from Hutton, a former Labour pensions minister, there are three places available on the commission. One of them could go to Peter Tompkins, who chairs the Institute of Economic Affairs Public Sector Pensions Commission, which will report its own findings in July, said Altmann.

‘One could go to the Pensions Policy Institute, but their work on the public sector has so far only taken the government’s own assumptions. I also think the TUC could have a place.’

Adam Lent, Trades Union Congress (TUC) head of economic and social affairs, said appointing a former Labour minister was of little comfort to public sector workers.

‘We are concerned by the messages around public sector pensions and we need to make sure the commission does a proper job. So we would look to have a union voice on the team,’ said Lent.

But John Moret, Suffolk Life marketing director, is more encouraged by the seemingly non-partisan appointment of Hutton.

‘The fact he comes from the other side of the House is hopefully indicative of the government’s approach and I hope the commission isn’t led by party doctrine,’ said Moret. 

‘There has been work done already by the IEA’s body which I’m sure he will use. Effectively he has been asked to produce numbers which will be fed into the pre-Budget report (PBR).’

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Article:  Advisers call for WP duo to be named | Publication: Money Marketing | Date: 2 July 2010 | Author: Stephanie Doctrow | Quoted: David Trenner

Advisers have joined calls from consumer group Which? for the FSA to name and shame the two with-profits funds it has referred to enforcement after finding their governance arrangements were not adequately protecting policyholders’ interests.

Which? chief executive Peter Vicary-Smith, Informed Choice managing director Martin Bamford and Intelligent Pensions technical director David Trenner have urged the regulator to name the firms in the public interest.

Bamford says: “It would help consumers make decisions with a bit more confidence.” Trenner says: “You have to assume it is not a firm selling new business.”

The FSA says it never names firms in advance of taking action against them.

In its with-profits review, the FSA found that a significant number of firms are not adequately demonstrating the practices it expects from a well-run with-profits business, especially in how independent challenge is provided by firms’ with-profits committees.

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Article:  Accusations fly over plans to up pension age | Publication: Herald Scotland | Date: 25 June 2010 | Author: Carolyn Churchill | Quoted: David Trenner

A generation of older people will be forced into unemployment by Government plans increase the age at which workers will receive the state pension, campaigners haved claimed.

Work and Pensions Secretary Iain Duncan Smith launched a consultation on proposals to extend the age to 66, with the rise likely to take effect from 2016 for men and four years later for women. It is part of plans to “reinvigorate retirement” to cope with a soaring pensions bill caused by an increase in life expectancy. Other changes include abolishing the default retirement age of 65.

But union leaders and campaigners accused the new coalition of class bias and warned forcing people to wait until they are 66 before they receive the state pension would affect those in poorer sections of society most.

Lindsay Scott of Age Scotland, said: “Before rushing through any increase to state pension age, the Government must first reduce the health inequalities between rich and poor and create a much fairer job market for older people. Failure to do so will force millions of older people, many of them poorer and with lower life expectancies, to work for longer or face another year trapped in unemployed limbo.”

In 1926, when the first contributory state pension was introduced, life expectancy was 57 for men and 61 for women. By 2008 it was 77 and 82 and is expected to reach 89 by 2058.

But Brendan Barber, general secretary of the TUC, said: “Raising the state pension age will hit the less well-off far more than the rich. Sixty-five-year-old men in Kensington and Chelsea can expect to live a further 23 years, while those in Glasgow only 14 years.

“A majority of 64-year-old men are already out of the labour market. Raising the state pension age will not help any of them stay in work. It will simply turn a generation of 65-year-olds from pensioners into the unemployed.”

Ian Campbell, a director at Spence & Partners, said that increases to life expectancy meant that changes to the state pension age could be justified.

But he added: “There’s quite a gap between those with best and those with the worst life expectancy and to increase the state pension age hits those more in the poorer sections of society.”

Figures show that if the state pension age had risen in line with average life expectancy since 1926, people would have to wait until they were 75 before they could claim it.

David Trenner of Intelligent Pensions in Glasgow, said he supported a more radical increase to 75, with extra financial support for those who could not work until that age.

He said: “The state pension was there not to provide income in retirement for everyone. It was there to support people who were incapable of working in the last few years of their life. It has changed completely from that.

“The reality is people live longer. It doesn’t make sense to be in a situation where the number of people working is less than the number drawing pensions.”

The basic state pension currently amounts to £97.65 a week but under moves announced by Duncan Smith, a “triple lock” system will guarantee that the payment will rise each year in line with earnings, prices or 2.5% – whichever is greater.

While plans to scrap the default retirement age were broadly welcomed, the Scottish Trades Union Congress called for more support for those who want to carry on working.

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“Economic uncertainty has increased over recent weeks as a result of the growing euro crisis. On the other hand global corporate default rates recorded a sharp month-on-month fall in May, reflecting the generally improving economic outlook and better credit conditions in the wider sphere. Industrial production in the eurozone grew for an 11th consecutive month in April, although with ever widening divergences between the main and peripheral states.”

Click here to see the full Investment View for June 2010