The big pensions transfer lottery
Lottery-sized sums offered to tempt savers out of work pensions
Juicy lottery-sized sums are being offered to savers to tempt them out of gold-plated workplace pension schemes and into personal plans.
In some instances, such as with our case study Richard Smith, below, the lure of a near-£1million lump sum – instead of waiting for a guaranteed annual pension of £24,000 – is too appealing to dismiss.
But some experts fear such tempting amounts – sometimes even exceeding £1 million – may not be enough to compensate for giving up predictable retirement incomes promised by the original pension schemes.
The demand for transferring workplace pensions into private arrangements has shot up since new pension freedoms were introduced two years ago.
The rules changed so that savers in employer schemes can transfer to personal plans and access their funds from the age of 55 if they choose – rather than being tied to the rules and retirement age, often 65, attached to the old arrangement.
Another key advantage is that personal pensions can now be passed on to the next generation rather than die with the owner.
The employer schemes involved are ‘final salary’ defined benefit pensions where retirement income is based on how long a person has worked for an employer and their pay. These are considered the ‘gold standard’ as the pension lasts as long as the scheme member lives.
Annual increases to offset inflation are provided while a spouse’s pension is also available. By transferring a pension, a saver has more control over their retirement money but loses all guarantees – and must accept more risk.
Typically the pension fund is invested with future income taken by drawing down on the fund’s capital. The temptation to switch has grown in the last year as transfer values have soared to record levels.
This is because of a combination of rock bottom interest rates and gilt yields. Members are offered a multiple of their promised income at retirement. This is usually between 20 and 25 times.
But since the Brexit vote, multiples of 30 are not untypical.
Stan Russell, retirement income expert at Prudential, says he has seen a near seven-fold increase in transfer requests recently with some eye-watering deals coming to his attention.
He says: ‘The other day I saw an offer of £975,000 – or 37 times the expected pension. Scary numbers.’
Fiona Tait, business development manager at pensions firm Royal London, says savers should keep a check on the transfer value provided as part of their annual pension statement.
But she warns that those still working for a firm are usually better off remaining in the pension. ‘You will get employer contributions which are lost if you leave,’ she says.
These record transfer values may not last if interest rates rise.
Ballooning Scheme Costs
The main reason behind attractive pension transfer offers is the desire by employers to stifle the ballooning cost of their pension schemes as members live longer.
By increasing transfer values, they hope members will leave.
When Isobel Mullady retired last year, aged 60, after 39 years at a tyre manufacturer she transferred her final salary scheme. She sought advice from Donald MacLennan, of adviser firm Intelligent Pensions, after being offered a sum 31 times her expected pension.
Isobel, from Dundee, says: ‘I am single and did not want the pension to die with me. I would like to leave the money to relatives.’
Serious thought must be applied before giving up a defined benefit pension. Keith Richards, chief executive of the Personal Finance Society, says: ‘Defined benefit schemes provide certainty, risk-free income and a degree of inflation protection. They should not be given up without significant research and financial advice, a requirement for transfers in excess of £30,000.’
Once a transfer has been completed, it cannot be undone.
When to stick with your work scheme – or twist to seek more CASH
- Current pension scheme too inflexible – retirement age too high.
- Single or widowed – a widow’s pension is of no importance.
- Access to a potentially larger tax-free lump sum.
- Can pass on pension pot (or what is left) to heirs. Die before age 75 and the balance goes to them tax-free. Over 75 and they pay tax on withdrawals.
- You are ill and have below average life expectancy. The transfer value should be larger than average.
- You are worried about your employer’s financial strength.
Why Stay Put
- Certainty. You will not run out of money in retirement.
- You will continue to receive employer pension contributions while working.
- Protection against inflation.
- Benefits for dependants if you die before them.
- Escaping a tax penalty for breaching the £1 million lifetime pension savings limit when transferring.
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This article was written by sally.hamilton from Financial Mail on Sunday (Daily Mail) and was legally lice