A client has a Section 32 pension.
The client is coming up to retirement age, they do not live in the UK and have no plans to return.
The client’s main requirement is a high income and as they have no children they are not so worried about the death lump sum.
Having analysed the pension we find out that it provides a Guaranteed Annuity Rate (GAR) of 8.7% per annum for life. (Note* this is not the case with every Section 32 pension).
Our view is that this is a very good income rate, especially when compared to current annuity rates which are very low.
Transferring to a QROPS would mean this GAR is lost and then any future income will be based on normal income drawdown rules.
Therefore we recommended that this particular client should leave the pension where it is in order to enjoy this high guaranteed income rate.
Our advice would not always be the same for every client as there would be restrictions to when annuites could be taken, the spouse’s benefit would have been minimal and there also would be no death lump sum for any other beneficiaries. So this solution would not be ideal in every case.
A client’s aims and objectives will drive the advice as for some people it may have been better to transfer this plan. This is why we fully review each individual pension plan and discuss with our clients what the benefits are, what the options are and what might be best for them depending on whether they require a higher lump sum, higher income, better spouse benefits, better death benefits for children, require income earlier than age 60, as many GARs are only applicable at age 60 etc.
The importance of each factor will vary depending on whether a client is married, has other income or cash available, has children, whether they are divorced and re-married, their risk profile etc.
Other reasons not to transfer:
- Fund value below £50k – expense ratio too high.
- Final Salary – the client wants the stable income with inflation increases and is happy for the pension to stop on the death of both the client and their spouse.
- Guarantees attached. – The pension has a Guaranteed Annuity Rate (GAR) or Guaranteed Minimum Pension (GMP) – ie the annuity could be in the region of 8-10% for life or the client could have a guaranteed income which is also in this region. (although with the latter the fund growth can increase to make the guaranteed income less attractive, you don’t know until retirement date, with the annuity you always get the % so if the fund goes up the % stays the same.
- The pension has an enhanced lump sum.