By Paula Butrynska
We all know that we need to review a client’s workplace pension if providing them with advice on their other pensions or creating a Financial Plan, but these should not be feared.
A workplace pension should be reviewed, especially if a client is continuing to pay in to it to ensure that it is invested in an appropriate investment strategy and where a pension transfer of it and/or other schemes are being considered. The workplace pension should be considered as a potential solution to transfer other pensions into in the case of a transfer or for further contributions, if the advice is to make some.
There are a number of factors that we should consider when looking at a workplace pension, and I hope this takes some of the fear out of considering them.
What the heck is lifestyling?
Defined contribution schemes, by default, will typically put members in lifestyling investment style strategies. The reason for this is to gradually reduce the member’s exposure to equities as they get nearer to retirement, as equities are seen as ‘riskier’ assets and are generally more volatile. Lifestyle funds will therefore be more heavily weighted to equities in the early years and ahead of the client’s selected retirement age and will hold a higher proportion of bonds and cash. However, this is true only for the client’s selected retirement age on the plan and makes the assumption that de-risking is wise for the client.
We need to make sure that if there is a recommendation to continue to invest in lifestyle funds, the selected retirement age is appropriate; otherwise, they might find themselves in lower-risk assets too soon and miss out on potential growth. Equally, if they decide to retire early, they could be taking too much risk just before they retire. Of course, we must also consider whether lifestyling is appropriate for them at all, and usually, a provider will offer differing strategies for different retirement strategies, i.e. drawdown vs annuity.
It might be that a client is too far from retirement to know how they will use their pension pot in retirement; however, some thought needs to be given to this and an assumption made. Whilst lifestyling might be quite useful ahead of a client buying an annuity to preserve the capital of the pension pot, if drawing down on their funds over 20 years or so is more suited to their situation, they might need to take more risk than they would be taking in a lifestyling pension in retirement.
How can benefits be taken?
Taking into account the retirement options that a pension scheme offers is another area that should be considered. Much of this depends on the life stage that their client is in. For younger clients or clients deemed to be in the accumulation phase of their lives, this is less likely to be important. However, for clients nearing retirement, it is important that we start to consider how their client is likely to take their pension benefits when they decide to stop working. Despite pension freedoms being introduced in 2015, we see plenty of schemes that do not offer flexi-access drawdown or only offer an annuity or transfer out.
How much does the plan cost?
It goes without saying that the less a client pays in charges, the more of the investment returns they get to keep. Workplace schemes tend to be at the cheaper end when it comes to charges; however, this varies a great deal and many older workplace schemes offer poor value for money. We need to understand how much the scheme costs, and charges can vary for the same scheme depending on which fund the client is invested in.
We find that it is sometimes particularly difficult to get a straight answer from the provider about how much the plan costs; however, they must provide this information – sometimes it just takes a little more encouragement than others.
I’m not planning on dying anytime soon
That might well be the case, but we know that it’s one of the two certainties in life.
Death benefits provided by pensions vary between schemes. Some schemes offer a return of the fund value at the date of death as a lump sum, whereas other schemes can offer the client’s beneficiaries a beneficiary drawdown option. This can have massive implications for the beneficiary, particularly if the benefits will be taxable and they pay tax at the higher or additional rate, so it is prudent to understand the client’s beneficiaries’ position to consider whether the death benefits offered by the scheme are appropriate.
Thinking about the Inheritance Tax position of the client is also a consideration here, as if the spouse is to inherit the pension and it provides a lump sum only, this will now be in their estate and assessed for IHT on their death if they haven’t spent it.
Making a nomination is key to ensuring that those who are intended to benefit will but also that the benefits will not accidentally fall into the client’s estate, as this can sometimes happen where no nomination is made.
Nothing is guaranteed
Except when it is.
Guarantees are often seen on older plans, and it is important to factor these into a client’s Financial Plan, as it could materially affect the client’s retirement. Benefits such as protected tax-fee cash at a higher level or Guaranteed Annuity Rates that far exceed what is available on the open market today are commonly seen. We also see a number of plans that have guaranteed growth rates on With-Profit funds and “guaranteed income” that is not officially a GAR.
Overall, there are a number of factors that Financial Planners need to be aware of and consider when reviewing a client’s workplace pension scheme. Often a thorough review of the plan is not conducted unless a transfer is being considered; however, it’s really important to get under the bonnet and look at the detail of your client’s pensions, as you never know what you might find. It is also ensuring that you are providing real value to the client. What may originally appear to be small nuances on a scheme can have an impact on someone’s retirement outlook, and understanding these can be fundamental.