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Who will help sort out this auto-enrolment pension scandal?

21 July 2017

  • Who will help sort out this auto-enrolment pension scandal?
  • Low earners losing money but don’t know it yet

I want to highlight a major pensions injustice concerning employers who choose an auto-enrolment scheme administered on a net pay basis.

Such schemes cannot add the 25 per cent bonus of tax relief to contributions of workers earning less than £11,500 a year from the employer.

Auto-enrolling these employees – mostly women – into a net pay scheme forces them to pay extra for their pension. Every £10 that someone on more than £11,510 a year puts into a pension will cost only £8 but every £10 low earners contribute costs them the full amount. So the lowest paid are paying £2 more for the same pension.

If their employer were to use a relief at source scheme instead, no one would have to pay more than £8 for their £10 of pension. But most employers would not understand the difference between choosing a net pay or relief at source scheme.

When discovering this as Pensions Minister, I tried desperately to address it but nobody was interested in helping the low earners. Officials said “It’s not much money”, which I found unacceptable.

Firstly, it may not be much money, but it could and should be theirs if their employer had chosen a different scheme.

Secondly, auto-enrolment contributions will quadruple and personal tax thresholds will rise, so the numbers of low earners and the amounts of money they are losing will just keep growing. When I was Pensions Minister I was astonished to find that even though I asked The Pensions Regulator to alert employers to the issue, they refused to listen. The first reason they have was that it is not illegal to deny low earners this money, so the Regulator could not get involved. I was so disappointed at this.

I then highlighted that the Regulator’s own template letters and website, designed to help employers choose a scheme and explain auto-enrolment, misleadingly said workers would receive employer contributions and tax relief under auto-enrolment when this was not necessarily true  if they were low earners in a Net Pay scheme. After many months I eventually persuaded it to change this but the wording was weak and fails to explain the issue clearly.

I met the people running the MasterTrust Assurance Framework, asking them to assess whether net pay schemes were being honest with employers and members about this issue as part of its seal of approval. But they too did not consider it an important issue.

I asked Treasury ministers to help. They initially replied that tax relief was being consulted on. Then I asked them to amend the rules or at least allow net pay schemes to reclaim the extra relief for their low earning members but was turned down every time. I did have one real success. Now:Pensions MasterTrust, which operates only on a net pay basis (Nest uses relief at source and The People’s Pension offers both) offered to pay the extra 25 per cent bonus to all low earners from its own resources. This was not widely publicised but it deserves high praise.

Since leaving Government, I have asked a series of Written Parliamentary Questions on this issue which have been replied to with non-answers. Ministers just continually ignore my requests to solve the problem, claim they do not know how many people it affects and that it is up to the Regulator to help and inform employers about how to choose a good pension scheme. Clearly, the current situation is unacceptable. All I can do is keep flagging it.

If or when these workers discover they have been charged more for their pensions than they should have been, what will they do? They had no control over the choice of scheme; it was arranged by their employer, who may have used an adviser or relied on regulator and Government guidelines. It is not clear the workers have any protection under the law, this hasn’t been challenged yet. But if the situation remains unresolved, I do believe this could turn into another scandal – which is the last thing pensions need. The injustice is only going to get worse. The sooner this issue is properly sorted, the better, and I would welcome help from you in pressuring for change.

July 21, 2017   Leave a comment

Pension Schemes forced to stop discriminating against same-sex partners

12 July 2017

  • UK pension funds cannot discriminate against same sex partners
  • Landmark ruling rightly requires pension schemes to treat all partners equally
  • Costs could run to hundreds of millions of pounds

The Supreme Court has ruled that same-sex partnerships must be fairly and properly recognised within UK pension schemes. In a landmark ruling, ( INNOSPEC VS. WALKER) the judges ruled that a pension scheme member who is married to a same sex partner must be treated the same as if they had an opposite sex partner. At last, there is clarity that pension schemes cannot discriminate on gender grounds in this way.

What has the Court ruling changed?  Until today, members who were married to someone of the opposite gender would know that their surviving partner will inherit part of their pension. Even if the member married that person long after they left the scheme, the inheritance rules would apply.  However, if the member had a partner of the same gender, even though they may have been together for decades, their pension scheme might refuse to pay a survivor’s pension on the grounds that the law only recognised gender-equal partnerships since 2005.

Will this affect all UK pension schemes? In reality, most pension schemes have already been treating all partnerships the same, but around 20% of private schemes have not yet done so and Mr. Walker, who has lived with his partner for decades, has sued the Innospec pension scheme because it refused to agree that his partner would inherit his survivor pension rights for the entire period in which he belonged to the scheme. Having had to fight all the way up to the Supreme Court, the issue has been settled and all UK pension schemes will now have to pay survivors’ pensions to same-sex partners on the same basis as they would for opposite sex partnerships.

What might this cost? Estimates suggest that the cost to private sector pension schemes could be around £100million and there will also be costs for public sector pension schemes too. Of course we will not know the precise costs because the money only needs to be paid once the member passes away and only if the  member is survived by their partner.

What other implications might there be? There could be further implications of this ruling, in that widow’s pension rights in many schemes differ from the pension rights of widowers.  In some schemes, a husband cannot inherit the wife’s pension, but a wife will inherit that of her deceased husband.  I expect this issue will now be looked at again – and the cost to public sector pension schemes could be hundreds of millions of pounds.

July 12, 2017   Leave a comment

Pension Freedoms need to work better for customers

12 July 2017

I welcome the FCA Retirement Outcomes Review and its focus on the customer but I am disappointed that the pensions industry has so far failed to radically change its approach.

The pensions industry needs to wake up to the tremendous new opportunities offered by pension freedoms and auto enrolment. This is the time to show real, innovative thinking in the customer interest but sadly the industry has so far failed.

Where are the new products or default options? And why are they called ‘default options’ anyway? The word ‘default’ is hardly attractive to non-pensions people!

Customers may be taking money out of brilliant pensions products without realising the benefits they are giving up – and possibly paying unnecessary tax too.

New thinking might include, for example, a concept of ‘Lifetime Pension Accounts’ which stay invested until you really need some income or capital. ‎These could seamlessly run from a ‘growth phase’ to an ‘income phase’ when the customer wants to, without the huge extra charges involved in drawdown. Taking money out of pensions too early is detrimental to your financial well being.

The Government’s free guidance service could also help customers understand the benefits of staying invested for longer especially if still working. So perhaps we should make PensionWise free guidance mandatory or at least the default option.   Ideally people need advice but at least PensionWise can steer them away from dangerous decisions

This FCA study is another wakeup call‎ for the pensions industry to up its game and look after customers.

July 12, 2017   1 Comment

Pension freedoms mean pension transfers make more sense

21 June 2017

Good news: Regulator wakes up to new landscape for pension transfers

  • Advisers encouraged to recognise that transferring out of a final salary scheme could be the right thing to do
  • Pension freedoms have radically improved attractions of Defined Contribution pensions
  • Vital to understand both risks and benefits, rather than assume transfers always wrong

The new world of pension freedom and choice paves the way for fresh thinking on transferring out of Defined Benefit pension schemes. Here’s a summary.

Strong reasons not to transfer will include:

  • If you are frightened that this decision is irreversible and you might regret it
  • If the DB scheme is your only pension
  • If you value the peace of mind of a guaranteed regular income
  • If you are concerned about inflation and have an inflation-linked DB pension
  • If you do not want to take investment risk
  • If you don’t want to pay someone to manage a pension fund for you
  • If you might exceed the Lifetime Allowance and face a hefty tax charge
  • If you might lose enhanced protection

And there are some strong reasons why DB transfers make sense:

  • If you have several DB pensions, could transfer some and still retain guaranteed income
  • If you’re in poor health and fear dying young
  • If you are single and have no use for spouse pension
  • If you want to pass any unused pension fund on tax-free to anyone you choose free of inheritance tax (and free of all tax if you die before age 75)
  • If you are happy to take some risk and want the chance to benefit from future tax-free investment returns
  • If you are comfortable with managing money or finding someone to do that for you
  • If you want a fund to help pay for care if needed (£20 a week DB pension could be worth £30,000-£40,000
  • In some cases, if you have large debts, the money could help you to pay them off

FCA recognises case against DB transfers has radically changed: The FCA has just launched a consultation which could change the way people wanting to transfer out of a final salary-type (DB) pension schemes are treated. Two years after the pension freedoms were introduced, making Defined Contribution (DC) pension schemes far more user-friendly, the Regulator is rightly recognising that the case against transferring out of guaranteed employer schemes has radically changed. Each case should be considered individually to assess the benefits and risks for that person.

Can be strong reasons to transfer out but must understand risks first: In the new pensions world, there are some compelling arguments in favour of DB transfers but the decision must not be taken lightly, particularly because it is irrevocable. Anyone whose transfer is worth over £30,000 must get independent financial advice.

Advisers have been under regulatory pressure to assume transferring out is wrong: In the old regime, the regulators rightly warned strongly against advising anyone to transfer. Indeed, financial advisers often refused to do the transfer for clients still wanting to after being advised against it. But the pension freedom reforms mean this attitude is outdated.

DC much more attractive now: Defined Contribution pensions, which build up your own individual pot of money for your retirement, are much more user-friendly now.

End of mandatory mass-annuitisation: In the past, someone who wanted to take their tax-free cash from a DC pension would usually have to buy an annuity with the rest, unless it was a very large fund. These annuities were inflexible and might not suit their needs. Now you can take out some money if you want to and leave the rest invested for later life. Some people can even get more tax free cash from a DC scheme than from DB.

No 55% death tax, can pass on IHT-free: People can now pass their pensions on in full to loved ones free of inheritance tax, whereas in the past they would face a 55% death tax charge on their unused fund. A DB scheme will only provide a fraction of the pension income for a partner and perhaps nothing for other relatives.

Those in poor health could benefit from transferring: Someone in poor health, who dies relatively young, will not have had much money from the scheme, but could pass on a fund to their loved ones instead. If they are single, the partner’s pension in their employer DB scheme will have no value to them.

Transfer values have risen enormously as interest rates have plummeted: Low interest rates have increased transfer values, which makes them more attractive. Capital sums worth 30 to 40 times the annual pension could provide good alternative financial security for some. There are those who think the period of low interest rates will end soon and, therefore, feel today’s transfer values are likely to fall in future, so want to take the money now. There is no certainty that rates will rise, but there are other reasons to consider transferring.

Some people have large debts: If you have no other way to pay off debts, it may be worth considering transferring a small pension to help you out. It is vital to get advice, perhaps from PensionWise first though.

Many have several DB pensions – could transfer some and keep others: Many people have a few past pensions from previous employers, often some small deferred pensions of only a few pounds a week. But these could be worth thousands of pounds. A £10 a week DB pension could be worth £15,000 – £20,000. People with a good base of guaranteed pension income from other past schemes could cash-in some while retaining others.

Could use DC transfer to provide money for care: People could also use the funds from a transfer to provide a pot of money for long-term care. A £20 a week pension would not pay for care, but £30,000 – £40,000 in a DC pension could help enormously. This alone is a powerful reason for those with several pensions to consider transferring, as nobody has set money aside to cover care costs. In fact, the Government should think about allowing tax-free DC withdrawals if used for care.

But beware of Lifetime Allowance rules: Given the sharp rise in transfer values, people need to be careful of hitting the lifetime allowance, or losing enhanced protection. DB pensions are treated much more favourably than DC under the illogical Lifetime Limit rules.  The DB lifetime allowance test of 20 times starting pension means a £40,000 DB income is worth well below £1m but could generate a £1.5m transfer value with a hefty tax charge.

Of course, many people will still be best-advised to stay with their employer’s guaranteed pension: Especially if they have no other pension, the certainty of the employer promise (even with the risk of reduction in the PPF) is very valuable. Those who value guaranteed income with inflation and partner protection, and do not want to worry about investment risk, should not transfer. The decision is irrevocable, so it is vital to get good advice first.

FCA recognises that DC pensions are more attractive now: Transferring out will not be right for everyone, but there are now some compelling arguments in favour of DB to DC transfers and the Regulator is recognising this reality with its consultation. That’s welcome news.

June 21, 2017   1 Comment

Manifesto cost May the election

11 June 2017

  • Tory Manifesto cost May the election
  • Social care proposals alienated core voters AND would have made care crisis even worse
  • There is no silver bullet – care crisis needs a range of solutions

The Tory Manifesto was a turning point in the election campaign.  To say the policy announcements on pensions and care were badly thought through would be an understatement. They don’t really seem to have been thought through at all.

The combination of means-testing Winter Fuel Payments for pensioners, with the draconian social care changes, suddenly saw the Tories’ traditional support among older voters waver.

Mass means-testing of pensioners has already been discredited due to the disincentives it poses to private pension saving. To extend means-testing in this arbitrary manner, without consultation and without proper understanding of how the policy would impact on pensioners, was a mistake of monumental proportions. To combine the two, looked like a punishment to families with loved ones who were ill, not just to older people.

This policy proposal is not only politically poisonous, because it hits the very people who are most likely to vote Tory – those who own their own home, or who have built up a nest-egg or some assets to pass on to their loved ones; it also would not solve the social care crisis anyway. All the political pain, for no policy gain. To suggest that the cost of social care could be met by means-testing Winter Fuel Payments is fantasy. And almost immediately, the Scottish Tories announced that all pensioners in Scotland would still get the money, so this was clearly not going to work.

Of course there were multiple issues that played a part in this debacle. Some were due to Labour’s promises of free tuition fees, school meals and higher minimum wages, but others were own goals such as foxhunting, grammar schools and ultra-hard Brexit. Such unforced errors played into the hands of the Opposition parties. But the real killer was social care.

The care crisis has been worsening for years and is in danger of bankrupting the NHS. The Tories are right to say this crisis must be addressed. Clearly, more funding is needed urgently, and the burden will fall on younger generations unless radical reforms are introduced. There is no one silver bullet that will solve this massive problem, but some elements of the solution were already in place. The Manifesto tore those down, rather than building on them.

Legislation was passed in 2014, with cross-party consensus, for a £72,000 cap on lifetime spending on ‘eligible care needs’ for home care or care home costs. This did not include the costs of board and lodging, which would be up to an extra £12,000 a year.

The legislation also increased the means-test threshold from £23,250 up to £118,000 of savings. At the moment, if you have more than £23,250 of savings or assets, you fund all of your own social care. Crucially, though, the value of your home was not taken into account in the means-test if you received home care or if you were in a care home but still had a relative living in your house. Then along comes the Tory Manifesto and proposes something altogether more draconian – suddenly opening up the social care funding crisis as a national political issue.

Instead of a £118,000 means-test floor, the Tories cut this to £100,000.

And this was to include the value of your home in all circumstances. So if you needed homecare, or you were in a care home and still had a partner living in your house, the value of your property would still count against you for council funding. Suddenly, millions more people would be hit by social care costs – most particularly those families whose loved ones had dementia or other conditions that did not count as ‘health’ needs. A millionaire with cancer could have all their care costs paid by the NHS and their house was safe. But an older person with dementia, and a home worth £250,000, would have to pay for all their care until most of their house value was gone.

There are so many reasons why the Tory Manifesto Care reforms were disastrous, not only because they were politically poisonous, but they would also actually make the care crisis worse. Here are some of the major flaws in the proposals.

They would actually worsen NHS bed-blocking:  Effectively, older people who owned their own home would have to pay for leaving hospital. Current bed-blocking often happens when older people stay in hospital until homecare is arranged for them. But if they know the costs will come out of their house as soon as they leave hospital, they and their children will have an incentive to stay in hospital for longer where care is free.

Proposals don’t give councils any extra funding to pay for care: The lack of social care funding, either at state or private sector level, is at the heart of this crisis. No money has been set aside by local authorities, or individual families, to cover elderly care costs. Councils will still need the funding to pay for elderly care and will not know when they will recoup the outlay from people’s homes. Repayment will depend on how long the person lives, and may also involve legal costs to enforce payment from an estate. This leaves current underfunding unaddressed and fails to help councils plan for long-term care.

Will disincentivise saving for care instead of incentivising it: A sensible social care funding policy would ideally encourage people to save to fund their care, similarly to incentives to save for an old age pension. But these proposals will discourage people from bothering to save for care costs as they will lose so much in the means-test.

Would increase strain on NHS: Older people may try to do without the help they require in order to avoid having to borrow against their house. More may then end up in hospital after struggling to manage without the care they need.

Would probably increase numbers of elderly people needing state support: The proposals would increase incentives for people to give their assets away earlier. Many may decide not to bother paying off their mortgages, or sell their home and give money to their children, or move into rented accommodation or take out more debt in later life. With £100,000 being all they can leave, perhaps to three children, the proposed system would have powerful incentives to spend or give money away early on in retirement, and then get state-funded care.

Savings incentives for Care ISAs or using pensions to help fund care are also vital: Just changing the means-test threshold or introducing a cap on total care costs such as proposed by Dilnot was only ever part of the solution to the care crisis. Today’s baby-boomers are already retiring and many of them do have ISAs and even pension funds, which they may not need to cover all their living costs in their 60s and 70s. Therefore, there is time to introduce incentives for older people to build up or use existing assets to pay for care.  Currently, there are no such incentives and nobody has savings earmarked for this. Encouraging people to save up to a maximum care cap, say £72,000 per person in a Care ISA that can be passed on free of inheritance tax, or withdraw up to £72,000 tax-free from their pension to pay for care, could help people protect themselves, without fearing they will lose almost everything if they get an illness such as dementia.

Proposals do not address the artificial distinction between social care and health care:  The social care system needs a radical overhaul as the public will increasingly reject the unfairness for dementia sufferers. A 90 year-old millionaire with cancer could have all their care paid for by taxpayers but if they get dementia they must pay for themselves. The Manifesto proposals worsened the unfairness, rather than addressing it. A solution to the care crisis will require rethinking the artificial differentiation between elderly health and care needs.

Those unlucky enough to need elderly care will still suffer double disadvantage – must pay for their own care and cross subsidise council underpayments for others: The Manifesto proposals did not address the stark unfairness that people who are unlucky enough to need care which doesn’t qualify for NHS funding, are hit by a double whammy.  They currently pay not only for their own care but also pay towards council-funded patients too as their care home recoups the underpayments by local authorities. Without more funding, councils will continue to pay too little and without sharing the burden across more than just those who need care, the social inequity will worsen.

People may not even be able to keep their last £100,000 as the floor may not be a proper floor:  The means-test threshold of £100,000 may not even be the floor because of the way the care system works.  Local authorities only fund what they consider to be the appropriate care cost for their area. Someone in a more expensive care home (perhaps because it is nearer to their family) or who wants more than 15-minute visits, will have to cover the extra costs themselves even when they are down to their last £100,000. Unless they move to a cheaper care home (which can be very distressing for frail elderly people) or accept less homecare they would eat into the remaining £100,000.

Social care is a life events which seems an obvious candidate for national insurance:  National insurance only covers what is classed as health care, but not social care needs. Surely, social care for elderly people would automatically have been included in Beveridge’s welfare state, had the reality of today’s elderly population been evident at the time.  A basic level of minimum care (like we have with a basic state pension or NHS) which people can then pay more to top up on their own, would be a fairer and more sustainable way forward. A sustainable longer-term solution could see everyone having to pay something into the system. If they don’t need care they are lucky, but if they do need it, then some money will be provided. Forcing old people to pay until almost all their accumulated assets are used up will mean more elderly people having no assets, ending up in poverty and falling back on state support. A recipe for failure.


The Tory Manifesto proposals for social care would be a disaster and are never likely to be implemented. The Labour and LibDem Manifestos talked of a National Care Service and increasing taxes. However, rather than using care as a political football, a national solution is needed. This could consider extra National Insurance payments, or a charge on all people’s estates, plus new savings incentives alongside pensions and ISAs, and integration of health and social care systems. The care crisis cannot be left any longer, the need for radical action is urgent and a combination of reforms is needed. The sooner politicians wake up to this and work together to find solutions, the better.

June 11, 2017   2 Comments

No room for complacency as UK firms struggle with pension costs

15 May 2017

I put in a response to the DWP’s 100+ page Green Paper consultation on the sustainability of final-salary-type pension schemes. My response was also lengthy, but I’ve summarised it for you below, although you can link to the whole thing from there if you want to.

I do feel that urgent attention must be given to consolidating schemes, moving away from the over-reliance on gilts (schemes need to ‘manage’ risk, not ‘minimise’ it) and using these huge sums of money more productively as we head towards Brexit. Almost all private schemes are closed and in five or ten years’ time those employers will have no interest in them, they can’t afford annuities and need a new self-sufficiency regime instead, as has effectively been done for BHS!

This is a really important issue.


Main points:

  1. The Green Paper seems too complacent about the affordability and sustainability of DB pensions. UK DB pensions are the most expensive in the world and most private sector schemes are now closed as the costs have soared beyond any previous expectations.  Potential post-Brexit economic uncertainty makes contingency planning for such huge asset pools even more urgent.
  1. Quantitative Easing has undermined DB schemes. It has inflated estimated liabilities, increased annuity buyout costs and driven excessive investment in lower-return bonds.
  1. UK DB pension schemes are currently misallocating resources, to the detriment of the economy and future generations.
  1. DB scheme advisers are too focussed on minimising risk, rather than ‘managing’ risk. Optimising returns rather than maximising returns is required, allowing for upside to outperform liabilities when schemes are in deficit.  Just focussing on matching liabilities is not enough, schemes need to outperform if they are in deficit with a weak sponsor.
  1. DB pension assets would be better used to invest in growth-enhancing investments, rather than just chasing low-return ‘safer’ fixed income.
  1. The Regulator needs more powers to oversee consolidation or merger of smaller and medium sized schemes, to achieve economies of scale, improved cost-effectiveness and efficiency of investment management and better governance standards.
  1. Pooling assets can help ensure better standards of investment management, access to more diversified asset classes, better quality advice and professional risk management.
  1. Current annuity buyout requirements are too draconian. Using BHS example, the Regulator should devise a new self-sufficiency measure (perhaps technical provisions plus a margin) to allow employers to sever ties without having to meet full annuity buyout costs.
  1. A regime is needed for the future of closed schemes, to ensure the assets and liabilities can be managed effectively over the long-term.
  1. Open schemes are in a very different position from closed schemes. As most private sector schemes are now closed, their sponsors will have no economic interest in their liabilities in a few years’ time, as no staff will be accruing benefits.


Edited highlights of full response to Green Paper consultation:  You can link to the full response here


  • UK Defined Benefit (DB) pension schemes are the most expensive in the world and employers may be hampered by legacy liabilities.
  • Unless the employer is facing imminent bankruptcy, benefits can never be reduced, and even changing the benefits can be difficult.
  • The regulatory regime worked reasonably well for the past 12 years. However, the DB landscape has changed significantly over time.  Most private sector schemes are now closed and if we wind forward 5 or 10 years, the employer currently responsible for scheme funding will probably have no workers in the scheme, so why would they have an interest in supporting it?
  • Quantitative Easing has damaged DB schemes and their sponsors by inflating assessed liability values and the costs of annuity purchase. Government policy must adapt to the new realities.
  • With Brexit on the horizon and such huge uncertainty about the future, planning for a new DB landscape now is the prudent approach.
  • There is no room for complacency, given the medium term outlook for private sector schemes.
  • I disagree with the Green Paper conclusions that employers could afford to fund their schemes more fully, but are choosing not to. It is true that some employers are paying dividends which could cover the costs of their deficit repair relatively easily, but they also have to support their business and other staffing issues.
  • The DB system is currently in an inter-regnum period, leaving the Government and the Regulator with a difficult balancing act to strike at this time. On the one hand, before private schemes close altogether, trustees need to try to get as much money in as possible.  But, on the other hand, if forcing employers to put more in today will just mean the business is weaker or more likely to fail, especially if there is near-term economic post-Brexit dislocation, members’ interests will be jeopardised.
  • The draconian annuity buyout requirements are placing much bigger burdens on employers than they are equipped to cope with. It is also driving excess emphasis on fixed income investments, at the expense of higher-return asset classes.
  • Using corporate assets to buy more gilts for pension schemes, potentially with money that will be needed as a buffer against economic downturns in future, could undermine the sponsor and ultimately the economy.
  • Some employers have already exceeded their capacity to support their scheme and cannot afford to walk away by buying annuities either. They are effectively prisoners of their scheme, thus harming competitiveness.  The current approach is trying to make the best, the enemy of the good.
  • To cope with the future run-off of DB schemes, Government should consider introducing a ‘Winding down regime’ that allows employers to sever ties with the scheme without having to buy annuities.
  • The prevalence of small and medium sized sub-scale schemes is hampering good outcomes, making benefits more expensive to deliver. A new regime is needed that can facilitate scheme mergers.  This will enable economies of scale to deliver more benefits, more reliably.
  • Although not ideal, I also believe the pragmatic approach is to allow schemes the chance to move indexation and revaluation from rpi to cpi. A statutory over-ride would recognise the unaffordability of some schemes for their sponsors and is the minimum adjustment that could help some schemes to manage their costs more sustainably.
  • Scheme mergers are going to be essential in the coming years. This will not only cut costs, but will also allow better governance and access to a wider range of investment opportunities.
  • Currently, there seems too much emphasis on ‘de-risking’ by means of switching to fixed income. This is, in my view, potentially damaging.
  • In light of exceptionally low bond yields, artificially distorted by central banks, the traditional risk models may be misleading. It is not clear that Government bonds offer ‘risk-free returns’ and in some cases they may be offering ‘return-free risks’.
  • Some schemes have lost out significantly by chasing gilts, rather than relying on supposedly higher risk assets.
  • Asset allocation now emphasises minimising risk, rather than maximising returns. This could be reckless conservatism and trustees need to manage investment risk, not just minimise it.  Given the uncertainty surrounding investment risk measures and the need to outperform (not just match) liabilities, switching to lower return holdings could increase the risk of failure.
  • Many smaller schemes do not have access to the most modern methods of money management and also fail to get the benefit of top advisers. Many do not have professional trustees or investment expertise on their board.  They would benefit from broader diversification and access to better investment approaches.
  • As we look forward over the next period, with most schemes closed, investment performance could be a key determinant of DB sustainability. Current sub-scale schemes are not likely to have the resources or expertise to make the most of the investment opportunities open to larger schemes.
  • The Regulator (and/or the PPF) may need new powers to negotiate terms on which schemes can ‘walk away’ from their liabilities, without full annuitisation. A new self-sufficiency regime would also require the Regulator to have increased powers to demand information from schemes, with penalties payable for non-compliance.
  • The Regulator should also have powers to facilitate scheme mergers on a more cost-effective basis, allowing trustees to judge what is in the best interests of members and, if they have made every reasonable effort to contact members, to allow them to ultimately consolidate or change the scheme without every single member’s consent.
  • Forcing sponsors to support unaffordable liabilities or go bust is a damaging binary choice. Using BHS as an example, it should be possible to devise a system whereby employers can pay a defined amount into their pension scheme, or commit to a programme of ongoing payments for, say, 5 years, that will end their responsibility.  This could be on the basis of technical provisions, plus a reasonable margin to allow for uncertainty.
  • The Regulator or PPF could introduce a range of consolidator funds to help manage long-term liabilities. These could invest assets in housing and infrastructure, as well as start-up businesses to provide an improved source of funding for the UK economy.
  • Small employers and charities urgently need relief from the draconian legal burdens that were originally designed in a different environment. For example, forcing plumbers to lose their homes and their entire life savings, just because they tried to provide pensions for a few of their staff, is disproportionately harsh.  Perhaps allowing them an RAA route can be considered.
  • Currently, there is little differentiation between requirements placed on open and closed schemes. An open scheme has very different characteristics, with much longer time horizons and greater ability to increase member contributions to cover rising costs over time.  It is closed schemes which need closest attention and consolidation.
  • I believe the Regulator should relax its attitude to DB to DC transfers. Many members, especially with small deferred entitlements, could benefit from transferring out, and the transfer value should, in my view, reflect any underfunding in the scheme. The assumption that it is almost never right for members to transfer is outdated, given the DC pension freedom changes.

May 15, 2017   1 Comment

Election Manifesto for older voters – 6-point plan for reform

20 April 2017

Help poorer pensioners, older women and families facing elderly care

  1. Radical overhaul of social care to ensure fairer system for all – a crisis worse than pensions
  2. State Pension triple lock could move to a double lock, increasing by prices or earnings
  3. Double lock should apply to Pension Credit so poorest pensioners are protected properly
  4. Improve pension outcomes for women – private pensions, State Pensions and WASPI
  5. Reform pensions tax relief to give everyone a 33% Government bonus on their contributions
  6. Encourage longer working life – mid/later-life training, career reviews, apprenticeships

Government plans for Brexit and the economy will dominate many people’s thinking, but a coming Election Manifesto needs to cover other important issues that will affect the lives of older voters significantly.  Here’s some initial thoughts – a six-point plan to improve older people’s lives, while giving a more affordable, sustainable and fairer system for the future.

Here are my suggestions:

  1. Radical overhaul of social care to ensure fairer system for all

In terms of fairness, it is absolutely vital that the Government finally addresses the ongoing and worsening crisis in social care.  The current system penalises elderly people and their families and lowers care standards, while raising the costs to those paying privately.  It is undermining the NHS and places the biggest burdens on those who fall ill, rather than being shared fairly.  There is no help for the poorest people with moderate needs, which makes it more likely that they end up in hospital or care homes and lose their independence.

Meanwhile, older people who do have savings have to lose everything, including the value of their home, before they get any state help at all.  The draconian means-test coupled with council cutbacks, on top of rapidly rising numbers of elderly people in our aging population has caused huge strain on the social care and health services, undermining the quality of social care (such as only allowing 15 minute visits and low paid staff on zero hours contracts).  The system is riddled with unfairnesses and is simply not fit for the 21st Century.  Private payers who are denied state help end up paying over the odds for care, to make up for local authority underpayment.  This penalises those families who are unlucky enough to need elderly care twice – firstly they get no help from the State and secondly they also have to pay extra to cover the costs of those who are covered by the State.

This amounts to a most inequitable stealth tax, hitting the most vulnerable in society.  To add further to the unfairness, elderly people who are judged to have a health need, rather than social care need, will have all their care costs met by taxpayers.  This arbitrary allocation of resources is unsustainable and is placing the NHS under intolerable strain, even before the huge bulge of baby boomers reaches advanced old age.  Proper integration of health and social care is long overdue.  It is obvious that the State cannot pay to look after all baby boomers who will need it in coming years.

There is no money set aside for this purpose and younger taxpayers will be unable to afford it.  Therefore, incentivising those older people who have pensions, ISAs or other savings to earmark a sum to pay for care, while the State then covers the extra on top of that, would kick-start funding which is currently non-existent.  Introducing a Dilnot-style cap on care costs, then allowing tax free withdrawals from pension funds if needed to pay for care, plus introducing a special Care ISA allowance (that can be passed on free of Inheritance Tax) or allocating some proportion of property value up to a limit of, say, £70,000 per person, would ensure baby-boomers have incentives to prepare for their coming care costs, while also signalling that everyone will need to think about providing for care in old age, as well as pensions.

  1. State Pension Triple lock could move to a double lock, increasing by prices or earnings

The triple lock commits to increasing (only some parts of the) State Pension by the highest of price inflation, average earnings or 2.5%.  The 2.5% commitment contained in the triple lock adds billions to the cost (it is estimated that State Pension has cost £3billion more for the years 2010 – 2016 than if a double lock had been in place).

The longer the triple lock lasts, the greater the future cost will be, with official forecasts predicting it will add at least £15billion to the long-term cost of State Pension provision.  The arbitrary 2.5% figure is a political construct with no economic or social logic.  When it was introduced, the State Pension had fallen well behind average earnings, so it served a useful function in increasing basic State Pensions to a more reasonable level.  But pensions have increased significantly relative to other benefits.

The Pensions Commission recommended only increasing State Pensions in line with earnings, but perhaps the Government should offer pensioners the higher of prices or earnings inflation, as a double lock, to protect against rises in the cost of living and average living standards of those in work.  If other benefits are being frozen, or only protected by either prices or earnings, to add the extra 2.5% protection for pensioners will cause increasing resentment and also adds to pressure to increase the State Pension age faster, which disadvantages those with lower life expectancy and in poorer health.  In addition to this, the new State Pension system has rendered the triple lock concept socially inequitable.

  1. Double lock should apply to Pension Credit so poorest pensioners are protected properly

The triple lock, in fact, contains inherent unfairness which will worsen in coming years as more younger pensioners receive the new State Pension.  The triple lock does not actually protect many of the poorest and oldest pensioners because does not cover all State Pension payments.

It only applies to two bits of State Pension – the old Basic State Pension (up to around £120 a week) and the full new State Pension (up to around £160 a week, but only available to the youngest pensioners).  Most importantly, it does not apply to the Pension Credit (which the poorest pensioners receive).  A much fairer system would see the double lock protection extended to Pension Credit to help the oldest and poorest pensioners.

  1. Improve pension outcomes for women – private pensions, State Pensions and WASPI

Women lose out in pensions in many different ways and, although the Government has made some improvements, both State and private pensions policies still discriminate against women.  As regards private pensions, women are losing out in workplace pensions.  There are several reasons for this.

The gender pay gap means they earn less than men, so their pension contributions will be lower but recent studies also show that women work in jobs with lower employer contributions and on average their employers pay 1% of salary less into their pensions than for the typical male.  Women also take career breaks which reduce their lifetime earnings.  In addition to these factors, women are also losing out in auto-enrolment as they are more likely to be low earners.

Only people earning over £10,000 a year in any one job are auto-enrolled by their employer.  So these lower earners lose out on their employer’s contribution and on the behavioural benefits of being automatically enrolled, even though they are the people who would probably most need better pensions and the behavioural nudge of being automatically enrolled.  Many women work in multiple low paid jobs, in order to fit their work commitments around caring responsibilities.  Even if these women’s total income is above £10,000, if they earn less than this in each job, they lose out on auto-enrolment completely.

The Government estimates that over 70,000 women are affected.  These women are also more likely to be losing out in State Pensions too.  The cracks in the National Insurance system penalise far more women than men.  Those earning less than £5,876 a year in any one job get no credit for their State Pension, even if they have multiple low paid jobs that would bring their earnings over the National Insurance threshold.  The Government estimates 20,000 -30,000 women are affected and they get no credit for their State Pension.

In addition, women who have children but are in households with incomes that disqualify them from Child Benefit have to claim the benefit even if they know they’re not entitled to it, otherwise they lose out on their State Pension credit too.  All these wrinkles in the National Insurance State Pension system should be removed, so that women are no longer discriminated against in these ways.  Finally, there are many WASPI women who were not properly notified of changes to their State Pension Age.  The Government should recognise the hardship its failure to communicate properly has caused and should ensure those affected are able to receive some early payment, to compensate for the short-notice increase in pension age which they did not have time to prepare for.

  1. Reform pensions tax relief to give everyone a 33% Government bonus on contributions

The Government decided not to reform the current system of pensions incentives, that revolves around tax relief.  The present arrangements are not understood by the majority of people, who don’t realise that 20% tax relief gives them a 25% Government bonus on their pension contributions, while higher rate taxpayers get 40% tax relief, which is a 66% bonus on their contributions.

Instead of confusing people with a Lifetime ISA that could also be used for house purchase, the Government should introduce a fairer system of pension incentives shared more fairly, with a 33% Government bonus being offered to everyone.  The annual contribution limit would need to be cut from the current £40,000, and the Lifetime Allowance should be reformed or abolished.  The freedom and choice reforms have made pensions the most attractive retirement saving option, but if the Government is serious about helping those in the middle or less-advantaged positions in society, then making the pension system fairer for all should be a priority.

  1. Encourage longer working life – mid/later-life training, career reviews, apprenticeships

If the Government is serious about controlling immigration, given the aging workforce it will also need to ensure that more older people stay engaged in the labour market than ever before.  This will need a radical rethink of workplace practice, as well as greater encouragement of mid-life training, career reviews and apprenticeships.

Those who can and want to work flexibly as they get older should be supported positively, with employers required to ensure age is no barrier to ongoing training and re-skilling opportunities.  Businesses should take the value of older members of their workforce more seriously and unlock the potential of older workers.  This can boost the economy both now and in future, as people have higher lifetime incomes and opportunities to build up better pensions.

April 20, 2017   11 Comments

Lifetime ISA launch – BEWARE

5 April 2017

  • Launch of Lifetime ISAs – don’t be fooled
  • Hardly any providers offering LISAs – probably due to complexity and mis-selling risks
  • Mixing house purchase and pensions will damage ISA brand
  • LISAs may be good for first time buyers, but dreadful for retirement – saving for house deposit very different from long term investment for retirement
  • Trying to turn pensions into ISAs undermines young people’s pension prospects
  • Why not just improve the Help To Buy ISA and leave pensions alone?!

The new Lifetime ISA launches tomorrow. Thankfully, most providers have steered clear of it, they can see the dangers. Don’t be misled. If you want to buy a first home and are saving for a deposit, then the 25% Government bonus is a great deal. But using this as a pension has significant dangers you may not be aware of. Most providers are shunning Lifetime ISAs due to fears of mis-selling. They are right. This is a complex product which could leave millions of young people poorer in retirement. It has mis-buying and mis-selling risks written all over it! There is already much confusion and the Pensions and Lifetime Savings Association (PLSA) suggests many young people are considering opting out of their workplace pension to save in a LISA instead. That could undermine their future prosperity, so it is important to clarify some of the biggest issues.

  1. LISA gives you much less than workplace pensions: The 25% Government bonus is exactly the same as 20% pensions tax relief so you will not get any more money in a Lifetime ISA than you would in a pension. However, you will lose out on other money if you opt out of pensions and choose LISAs instead and you need to understand this before you decide.
  2. Pensions give you much more than just a 25% bonus: Workplace pensions can give you extra money from employer contributions, higher rate tax relief and National Insurance relief. This could be more than 100% bonus on your money, so pensions will usually give you far more than the Lifetime ISA on day one. It’s just that this is not properly explained when you get your pension statement, so most people don’t realise it.
  3. The 25% withdrawal charge is NOT just clawing back the 25% bonus. Many people do not realise how the LISA works and will believe they just lose the Government bonus. It’s much more than that.
  4. The LISA charges more than 6% penalty if you want your money back: If you put £4000 into a LISA and get the £1000 Government bonus but then want to take your money out again, the 25% withdrawal charge will be £1250 (and you will have to also pay charges for your LISA account too of course). That means you will get less than £3750. You will be charged more than £250 just to get your own money back – a large extra penalty.
  5. Mis-selling and mis-buying risks are clear – customers need advice: LISA providers may not clearly explain the risks of the large withdrawal penalties, and how much money young people will lose if they opt out of employer pensions. The FCA is trying to ensure risk warnings are given, but in reality the provider should check that customers have not opted out of workplace pensions, or have taken financial advice, so they have made efforts to check if a LISA is suitable for them.
  6. Saving for a house deposit in cash is fine, but cash is not suitable when investing for retirement over several decades: It is dangerous and misguided to conflate saving for a deposit on a first home, with investing over several decades for retirement. House purchase saving can be in cash, but long-term investing should be in growth assets and a broader spread of risks, including overseas investment, which would not really be suitable for a house deposit, but which can give better returns over time. Most ISAs are held in cash and, if pensions are turned into ISAs that are just put into cash accounts, young people are likely to be much poorer in later life.
  7. Serious risk of undermining the success of auto-enrolment: Pension coverage has spread to millions of new workers as employers have to put all staff earning above £10,000 a year into a pension scheme at work. But worrying PLSA research suggests many young people may opt out of their workplace pension, without realising how much they’d lose by doing so. Just as auto-enrolment is proving a success, along comes a new product to confuse things. It is not true that people don’t like pensions, auto-enrolment opt-out rates are really low, especially among the young. I am pleased that so few providers are offering this product because most young people will be better off in retirement if they use a pension.
  8. Behavioural nudges of Lifetime ISA are not suitable for retirement saving: The Lifetime ISA has behavioural features that make it far less suitable for retirement saving than a pension. Pensions are designed to fit with the principles of behavioural economics, while ISAs have perverse incentives.
  9. Pensions ensure more money goes in on day one. Auto-enrolment takes advantage of inertia as well as ensuring employers have to contribute too, so people have more money to begin with in pensions than in LISAs.
  10. Pensions are locked in until later life, while LISA does allow withdrawals. However, withdrawals face the stiff penalty of over 6%, leaving people with much less in their fund along the way.
  11. Pensions are taxable on withdrawals beyond the 25% tax-free lump sum in later life. This deters people from spending the money too soon, which is the right behavioural incentive. The incentive with a LISA will be to take all the money out around age 60, and have nothing left for your 80s – in other words, the features of the Lifetime ISA mean it is designed NOT to last a Lifetime.
  12. Pensions could even help pay for later life care. Pensions encourage people not to spend their money too quickly and, because they pass on free of inheritance tax, there is no need to worry about keeping it till much later life – so it could even help fund care needs if necessary. Young people will have much poorer retirement prospects with LISAs than pensions.
  13. Lifetime ISAs are great for the wealthy but will cost taxpayers an extra £1billion – is that money well spent? At a time when bereavement and child benefits are being cut, the LISA is going to cost an extra £1billion to the Treasury in the next few years. Two groups of people will most benefit from using a LISA for retirement saving. Firstly, wealthy under-40s who have already filled their pension allowances (perhaps they already have £1million of pensions or have contributed up to the £40,000 maximum into pensions). Secondly, non-earning relatives of wealthy people who have already put the maximum £3600 into a pension for them to get the tax relief and will now get a further taxpayer top-up for an extra £4000 for them. Is this a sensible use of taxpayer resources?

CONCLUSION: Lifetime ISAs should be abandoned. Stop confusing young people between retirement investment and saving for a house deposit – just reform the Help To Buy ISA and build on the success of auto-enrolment for pensions. The product is too complicated, will confuse customers and the last thing we need is another mis-selling scandal.

April 5, 2017   Leave a comment

Transferring Out Of ‘Guaranteed’ Employer Pensions Can Be A Good Idea

5 April 2017

Last night I attended an interesting event run by the Financial Times.  A large group of people came along to learn more about transferring out of Defined Benefit pension schemes.

It was an interesting session.  I thought it might be helpful to outline my views on this issue, as the conventional thinking is not necessarily fully reflective of new realities.  This is not meant to be giving anybody financial advice, this is about highlighting the important issues that need to be considered, understanding the questions you need to ask and the value of getting financial advice.  Whether or not to transfer out of a final salary-type scheme will depend on a complex array of factors that will be personal to each individual.  There are some rules of thumb that can be given, but even then it will be best to try to find a financial adviser to help you make sure you’ve considered all the vital issues.  I am trying to give a more balanced view here.

There are no absolutely right or wrong answers, but I certainly believe that the current regulatory attitude is out of date.  The FCA and the Pensions Regulator both insist that it will almost always be wrong to transfer out.   FCA guidance states ‘in most cases you are likely to be worse off if you transfer out of a defined benefit scheme, even if your employer gives you an incentive to leave’. (  This statement ignores the new realities and complex uncertainties of planning long-term income support in later life.

The benefits of a Defined Benefit pension may not be relevant to some people and, in fact, there are good reasons to consider transferring out.  That does not mean it will be right to actually transfer, but particularly with transfer values at such high levels, people may want to at least consider it because there are several potential advantages, particularly after the changes which have made Defined Contribution pensions far more user-friendly, tax efficient and effective for later life planning.  In the past, transferring out of a Defined Benefit scheme offered much lower values and people would often need to buy an annuity which represented worse value than their scheme benefits.  But in the new DC landscape, people have more flexibility and choice as to how to use their pension fund as best suits their circumstances.

People with a few DB pensions from previous employers, some paying quite small amounts of income, might benefit from transferring thousands of pounds from some of their DB schemes into a DC pension instead.  With transfer values having risen significantly, a pension of £20 a week could give £20,000 – £40,000 for a personal pension.  Those who are still working and have other secure pension income, could benefit from having the money in a DC scheme which can grow tax free and stay there for them until they are much older, perhaps even to help fund care or be passed on tax-free to loved ones.

Of course, Defined Benefit pensions do have advantages over Defined Contribution arrangements.  Here is a list of many of those advantages:

  1. DB schemes pay lifelong pension income – you can plan your lifestyle without worrying about market falls
  2. If you live to a ripe old age, your income should still carry on
  3. Even if the company in charge of your pension scheme fails, you are protected by the Pension Protection Fund (although the level of PPF benefits can fall in future if too many schemes fail)
  4. You don’t have to worry about what to do with your pension fund or how to get income, those decisions are made for you as the promised income (or PPF benefits) should just be paid to you for life
  5. You don’t have to worry about investment performance, that is taken care of by others
  6. Defined Benefit schemes also pay some pension to your spouse if you die first – and some will pay something to dependent children too
  7. Any pension income that relates to membership of a scheme since 1997 has to have some inflation protection (and some schemes do offer inflation protection before that too)
  8. Many people had part of their state pension in their final salary-type scheme and this is protected by extremely generous annual uprating every year until you reach pension age (unbelievably generous in many cases)
  9. Tax treatment for Lifetime allowance is more generous for DB than DC schemes


Why these advantages may not always be as brilliant as some people think

  1. If you are in poor health, you will not get much out of your employer scheme, whereas with money in a personal pension, you can pass the fund on tax-free
  2. If you are currently healthy but die soon after reaching pension age, you cannot pass any pension fund on – your pension dies with you as you have no ‘fund’
  3. If you are single, the spouse’s pension has no value to you
  4. A spouse’s pension is only a fraction of your full pension, usually half your previous pension
  5. If your pension relates to an employer you were with before 1997, you may have no inflation protection in your promised pension
  6. When you draw your pension income, if you are still working you will be taxed on it, possibly at higher rates, whereas if you have the money in a DC fund you can keep it tax free until needed
  7. Although the pension income should be guaranteed for life, there is a chance that your scheme will fail, and the income you were promised could be cut. This needs to be factored into your decision, especially if the employer sponsoring the scheme is in difficulties.
  8. If you have a very high level of income from your Defined Benefit pension scheme, it can be severely reduced by the PPF cap.
  9. PPF benefits could possibly be reduced in future if too many schemes fail (although at the moment the fund has been run very well and is in surplus so this currently seems unlikely.)


Potential advantages of transferring out of a DB scheme into a DC scheme

  1. If you die relatively young, you can pass on your pension fund to whoever you wish. If you die before age 75, it will pass on free of all tax, whether it is spent now or in future.  If you die after age 75, you can pass it on tax free and it stays tax-free until the person who inherits it takes money out.
  2. Your spouse can inherit your pension fund in full (rather than only a fraction of the income)
  3. If you have other guaranteed income, you may find a capital sum more useful
  4. You have ownership of an individual pension fund in your own name instead of an income entitlement that is either fixed, or rises by inflation or a small percentage each year
  5. You can be in control of your own investments and have a chance to grow your eventual pension
  6. Transfer values are at record highs, so you will receive a large sum of money if you transfer. For example, a small DB pension worth £500 a year for life, could actually give you a capital sum of £10,000 – £20,000 to put into a DC fund.  A DB pension that would pay £20 a week for life, could give you £20,000 – £40,000 capital sum to invest in a DC pension arrangement.
  7. If you have other pensions elsewhere, (many people have more than one DB pension from past employers), then transferring some smaller pension entitlements can give you a fund that you can invest for future growth, but can also be there to pass on to others or to support you if you become ill or die young.
  8. If you need money to pay for social care and especially if you have no other savings that could fund such expenditure, then having a pot of money in a tax-free DC pension could be a sensible way to build up a ‘care’ fund. One in four of us is likely to need thousands of pounds for social care in later life, but almost nobody has money set aside for that purpose.  Exchanging a small amount of lifelong pension income for a lump sum that can grow over the years to help with care costs can be a sensible choice for some.
  9. If you need to repay debts or a mortgage, you may benefit from using some of your DB funds even after paying tax – but make sure you get advice on how much tax you’d need to pay


Potential disadvantages of transferring out of a DB scheme into a DC scheme

  • You give up a lifelong income stream
  • You will have to pay fees on your DC pension fund which might reduce your future pension income
  • Your fund may have poor investment performance, so your future income may not be as high as the pension you gave up when you transferred
  • You will have to monitor your investments in a DC scheme for future years, whereas the DB pension is looked after by trustees and just paid out to you over regularly over time
  • You may find you go over the lifetime limit on DC pensions and have to pay tax – make sure you get advice on your tax position before deciding to transfer out


You really should get financial advice:

If your transfer value is worth over £30,000 you have to have an independent financial adviser to help you, but even for sums below that it is worth considering paying an adviser to help.  The decision is individual and will represent a complex balance of risks and potential benefits.

Here are some questions you need to think about and discuss with an adviser before making a decision – and don’t forget, once you’ve transferred out of a DB scheme, the decision is irreversible.

12 of the questions to consider before transferring from DB to DC:

  1. Is this just one of a number of pensions and I want to cash some in and leave the rest as income?
  2. Do I have other secure pension income?
  3. Am I in poor health and not expecting to draw the guaranteed pension income for very long?
  4. Am I still working and intending to keep on doing so?
  5. Will I pay higher rate tax on my pension income?
  6. Do I want to pass pension assets on tax free to the next generation if I don’t need them myself?
  7. What will I live on for the rest of my life?
  8. Do I need a guaranteed income for myself or a partner?
  9. Do I have other monies that could help fund care or might I want to use this?
  10. Do the DB pensions I have offer inflation protection (not all pensions accrued before 1997 will have inflation linking)
  11. Am I happy to pay fees and keep investing to grow my fund further in future?
  12. Do I understand the tax implications of transferring out (BEWARE, this is complex!)



Understand the issues before making any decision about transferring out of a DB scheme.  It may be right for you, especially if you’re in poor health, or you have other pensions, or are still working and want to benefit from future investment returns (accepting the risks and costs of course).  With current very high transfer values, (driven up by exceptionally low gilt yields following the Bank of England’s policies that have artificially depressed interest rates) many people are thinking about this.  There are advantages and disadvantages and a complex array of risks and benefits that you should consider for yourself.  Finally, make sure you get financial advice so you understand the tax and cost implications.

April 5, 2017   4 Comments

Cridland State Pension Age Review

23 March 2017

Cridland Report emphasises importance of working longer but shies away from allowing early State Pension for those who can’t

Summary of my views:

  • Yes it is important to help people work longer, especially after Brexit
  • Yes Government should end the triple lock which doesn’t protect oldest and poorest pensioners properly anyway
  • Yes we must tell people about any increases to their State Pension age
  • Yes adults caring for elderly relatives need more help
  •  BUT I would go further in recognising differential work history and life expectancy by allowing early access
  • Current system helps those who are healthy and wealthy enough to wait longer for State Pension, while giving nothing to those who genuinely cannot keep working


  • People under age 45 will get no state pension until age 68.
  • Just increasing state pension age prolongs disadvantage for occupations and regions with known lower life expectancy.
  • I hope this review will help pave the way to end the increasingly unfair triple lock.
Cridland is right to focus on helping people work longer, especially part time: I’m pleased to see the Review suggesting reforms such as later life training, mid-life career reviews and protection for carers, which I recommended as Business Champion for Older Workers. Retirement can be a process rather than an event, with people cutting down gradually rather than suddenly stopping and more help for people to stay in the labour market longer is important.

Brexit makes later working even more important:  We should not force people to stay on and should recognise the wide variations in life expectancy across occupations and UK regions, but as we leave the EU and immigration falls, it makes sense to use older workers’ talents and lifelong experience more.  This can boost the economy and their own future income.

But many people genuinely cannot keep working and State Pension currently doesn’t make allowance for this:  Cridland highlights the vast differences in life expectancy across the UK – more than 15 years differential.  Just as the Review recommends more flexibility is required by employers to facilitate part-time work for older people and help for the increasing numbers of workers who will need to care for elderly relatives, I believe more flexibility is also needed in the State Pension system.

Disappointing that Review decides against early access: People with shorter than average life expectancy generally still pay around a quarter of their salary in National Insurance. They may have worked for 50 years or more but may die before being eligible for any state pension – or may receive very little. This seems inequitable and their lower life expectancy is not recognised by our National Insurance rules. Normal insurance would usually charge lower premiums to such people but that does not happen. Therefore allowing early access could compensate for this even if for a reduced pension.

Current system only helps those who are healthy and wealthy enough to work longer:  If someone can work beyond state pension age, they can get a much larger pension but there is no help for people to get their state pension earlier if, for example, they started work exceptionally young, perhaps in tough industrial jobs, and genuinely cannot keep going till nearly 70.  Cridland recommends some means-tested help just one year before State Pension age but I think moving away from just one ever-increasing age, would be more socially equitable.  A band of starting ages, such as between 65 and 69 with adjusted payments would be fairer.

Spurious accuracy of ensuring receipt of State Pension for ‘up to one third of adult life’: The aim of the Review was meant to ensure people spent ‘up to one third of adult life’ receiving State Pension.  The Government Actuary’s Department figures vividly highlight the difficulties of such a vague target.  Tiny changes in average life expectancy are shown to imply vast differences in timing of state pension age increases.  Between 2012 and 2014, life expectancy fell a little, but that implied a 5-year change in the state pension age timetable.  It does seem that targeting 33.3% of ‘adult life’ or 32% of ‘adult life’ is misleading, given the sensitivity to tiny changes in mortality and huge differences in life expectancy across the population.  A range of ages would surely better cater for individual differences and allow some flexibility.

Problems for WASPI women show dangers of raising state pension age – lessons need to be learned: The Government also needs to learn from the women’s state pension age fiasco that it is essential to ensure people know about any state pension age changes in good time to prepare. Many older women are facing serious hardship as a result of Government failure to communicate with them and there has been no recognition of the damage this has caused so far.

Triple lock should be scrapped – it is a political construct that is increasingly unfair and leaves out oldest and poorest pensioners: I agree with Cridland that the triple lock should be abandoned after 2020. The triple lock is a political construct which purports to offer great protection while increasingly disadvantaging the oldest and poorest pensioners. The lock protects around £160 a week for the newest pensioners but only around £120 a week for older ones and it does not protect the Pension Credit at all which the poorest pensioners must rely on.  The arbitrary 2.5% figure has no economic or social rationale. Cridland suggests linking the State Pension just to earnings but I would like to see some protection against inflation too if that is rising faster.  There is a clear tradeoff between more generous pension increases and raising state pension age.  Having the triple lock in place also puts more upward pressure on the state pension age which itself disadvantages poorer areas of the country and those in heavy manual occupations. So the unfairness and extra cost of the triple lock make it ripe for reform.


March 23, 2017   2 Comments