4 pension perks you don't want to lose
Steve Patterson, MD at Intelligent Pensions met with Michelle to discuss some of the potential benefits that can be available in older pension schemes which might well be worth holding on to!
Steve identified 4 key areas people should look for:
1. Guaranteed annuity rate
Guaranteed Annuity Rates were sometimes made available when gilt yields – which are used to calculate annuity rates – were very high and the product developers could not believe that gilt yields would fall to the rates seen today. Many of the GARs are at a far higher rate than any annuity rate you could buy today.
Steve said: ‘For people who took out a policy more than 25 years ago many [of the pensions] will have a GAR because gilt yields were so much higher and providers at the time couldn’t conceive of gilt yields at 3% [like we have today] when at the time they were 12%.
‘At the time putting a GAR in place was giving away something for nothing.’
He added that the GARs put in place in some instances had caused major problems for insurers such as Equitable Life.
2. Certified tax-free cash
Steve commented 'In these schemes…the tax-free cash entitlement was not calculated [as a percentage of] the fund but by the salary and length of service, with the salary calculated based on the last three years or sometimes five years of work,’ said Patterson. ‘That can given rise to tax-free entitlement higher than 25%...and depending on the value [of the pension fund] relative to salary you could take it all tax-free.’
3. Supplementary death benefits
Steve said that ‘In addition to the [pot of money] they may also have life insurance on a fixed premium which could not be replicated in cover on the open market,’. ‘If you transfer out of the pension you lose the cover.’
4. With-profits maturity bonus
Transferring away from the pension before the pre-set time ‘could mean you miss out on that bonus’, said Steve.
Even if a retiree isn’t bothered about losing the bonus, they still had to be aware of the ‘market value reduction’ rules around these policies. The market value reduction allows insurers to give you your pension pot but only at the current rate they have set out.
This rate could be lower than you expect and that is to ensure the people left in the pension scheme are not disadvantaged too much by you taking your money out; with-profits works by pooling the assets of all investors and providing smooth returns.’
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