Roughly 15% of defined benefit (DB) pension schemes offer partial transfers. Now a household name, Ford has joined the club. It has recently announced it will permit its DB pension scheme members to transfer 50% of their pension entitlement instead of all of it if they so wish.
Ford has brought DB transfers back into the spotlight. There are the purists who argue you should not transfer a DB pension, full stop. Then there are those who argue that partial transfers should be any percentage you wish, identify what the regular essential income you must have, and then transfer the excess and take that flexibly.
Then there are those who say placing tax-free cash into an ISA is similar to a partial transfer but this then stirs the argument of why commutation factors for tax-free cash are so much lower than the conversion rates for a transfer value.
In November 2014 the Pensions Policy Institute published a paper, ‘How complex are decisions pension savers need to make?’ It concluded that defined contribution (DC) pension retirement decisions were among the most complicated an individual made during their life. They did not consider DB pension decisions.
However, if Ford’s decision has prompted so much comment from pension experts, what is the poor consumer meant to do?
DB pensions can include a myriad of options – to take reduced benefits early; to defer taking benefits in return for increased benefits; to take some as a tax-free lump sum; or to give up some pension in favour of a dependant. Not all these options are always available, but a transfer or partial transfer to a DC pension may also be available.
This makes the choices for DB pension scheme members even more complicated than those who have a DC pension only. If the individual has several pensions or different types, how do they begin to sort their options and organise their pensions in a way that is best for their personal circumstances?
We know that the majority of those approaching retirement have inadequate pension savings. Others are approaching retirement with large amounts of debt, including interest-only mortgages with no planned way to repay them.
Some 70% of pensioners are home owners. Therefore it is probable many will look to call on the equity in their home to help their retirement finances at some time during their retirement, especially if large care bills arise. This then raises a number of questions. Will they use their housing wealth? When will they use their housing wealth? How will they use their housing wealth?
The answers to these questions will impact upon what decisions they should make regarding their pensions. Have we gone back to the beginning talking about pension options?
Should pension and investment advisers therefore include use of housing wealth solutions in their advice to those retirement clients who have insufficient pension savings to meet their retirement income needs?
If the pension solutions for many are dependent on whether (and how) they will use their housing wealth, what about the person who goes to a mortgage adviser with an interest-only mortgage they have no means of repaying? The solution will not only include consideration of the relative merits of a retirement interest-only (RIO) mortgage, but also equity release and downsizing.
Those considerations will, to some extent, depend upon what pensions they have and what sustainable income they can generate. Here the mortgage adviser also needs to consider the pension options available.
When it comes to retirement financial planning, I am reminded of Frank Sinatra’s song ‘Love & Marriage’ which goes on to say ‘go together like a horse and carriage and I tell you brother you can’t have one without the other’.
When it comes to retirement financial planning should the song be re-recorded again but with the title ‘Pensions & Housing’?
Bob Champion is chairman of the Later Life Academy