Finally, some good news for pension savers with Equitable Life. The UK’s oldest mutually owned insurance company has been a byword for scandal and disaster over the past 20 years, but plans for its sale will finally offer savers some respite.
Equitable has some 260,000 policyholders with pension cash in its with-profits fund, an opaque structure once popular with savers that aims to smooth out the ups and downs of investment returns. Since the insurer came close to total collapse in 2001, after losing a court case over how it managed pension annuities, it has been closed to new business, and the with-profits fund has been completely moved into low-risk assets paying meagre returns.
Now, however, Equitable’s sale to Reliance Life will free up assets held in the fund as insurance, enabling the insurer to distribute the money in the form of top-ups to savers’ pension funds. It estimates these windfalls will be worth an average of £6,900, on a typical pension policy of around £20,000. However, this isn’t a done deal yet. Next year, Equitable’s with-profits policyholders will get a vote on the sale. If they agree, the High Court will need to give its backing. In return for the windfall, savers will have to agree to their policies being converted to unit-linked pension plans. This means that the value of the plans moves up and down in line with the value of the assets in which they’re invested. And unlike Equitable’s with-profits policies, unit-linked plans do not offer a guarantee that they will be worth at least a minimum amount when savers reach retirement.
But it’s not all good news
Nevertheless, the best option for Equitable savers will probably be to vote in favour of the deal. The insurer itself says that 95% of its with-profits pension plans are currently worth more than their guaranteed value, even before any windfall is paid out. The protection that the guarantee offers is therefore theoretical – though that could change if the bond markets, in which the Equitable with-profits fund is now invested, suffer significant setbacks.
It’s also worth remembering that the sale will offer no benefit at all to 945,000 with-profits savers who have left the insurer since its legal problems began. Moreover, the deal will also make little or no difference to around 50,000 Equitable pension savers with unit-linked plans at the insurer. They will get no vote on the sale and receive no windfall if the deal goes ahead, though their policies will also be transferred to Reliance Life.
What next for Equitable savers?
In the short term, the best course of action for Equitable savers is to sit on their hands. Anyone leaving the insurer before the Reliance Life deal is complete – by cashing in their savings on retirement, for example, or transferring their policy to another insurer – will miss out on the policy uplift.
If you need to take cash from your Equitable savings in the meantime, take professional independent financial advice. One option, assuming you’re over the age of 55, could be to use the pensions freedom reforms to cash in part of the money so that you’ll still get some windfall benefit.
Once the transfer is complete, no current with-profits or unit-linked Equitable policyholder has to stick with Reliance Life. It is a specialist in running closed life-insurance company funds rather than a business known for pension investment, though it does offer a choice of funds. The alternative is to move your fund to another pension provider or, if you’re over the age of 55, to take the savings in cash and invest the money elsewhere. Again, however, it makes sense to take independent financial advice on your options – including the potential tax implications of cashing in your savings. You’ve got time to decide – Equitable does not expect the vote on its sale to take place until mid-2019, with final High Court approval due later in the year.
Tax tip of the week
HM Revenue & Customs (HMRC) has updated its “advisory fuel rates” (AFR) from 1 June, says the Tax Tips & Advice newsletter. These rates apply when you either reimburse staff for business travel in their company cars, or require them to repay the cost of fuel used for private travel. However, the fuel prices used by HMRC are based on historic averages, so haven’t kept track with recent price rises. So be aware that the fuel rates are, as the name suggests, only advisory, and HMRC won’t object to you using your own figures (see TipsAndAdvice-tax.co.uk/download for a calculator to help). Note that if you pay rates that are higher than the AFR and can’t demonstrate the fuel cost per mile is higher, you’ll have to treat any excess as taxable profit and as earnings for Class-1 national insurance purposes.
Thousands face state pension cuts
Poor record-keeping and administrative mistakes could result in tens of thousands of people receiving lower-than-expected state pensions – including many existing pensioners, whose income could be cut.
The problem potentially affects anyone who contracted out of the State Earnings Related Pension Scheme (Serps) during the 1980s and 1990s. Many employers with occupational pension schemes automatically contracted out their staff, since this reduced the national-insurance contributions they had to make on employees’ behalf. Contracting out meant individuals accepted they would get a lower state pension payout, but employers had to offer a guaranteed amount of occupational pension income instead.
Now, however, reviews of employers’ records ordered by HM Revenue & Customs (HMRC) are turning up discrepancies, with many people receiving higher guaranteed pensions than HMRC’s own records show. These people are therefore having their state pension entitlement adjusted downwards, even if the benefit is already being paid. Around 2% of records appear to be incorrect, according to professional pension advisers who have reviewed 500,000 cases so far, meaning thousands more could be affected.
The first many hear about the problem is when they receive a letter from the Department of Work and Pensions advising them of their reduced benefits, though the government has promised overpayments already received won’t have to be repaid. If you think you could be affected, ask your occupational pension schemes what they are doing about reviewing records – and whether your entitlement is at risk.