Bumper pension scheme transfer values are luring thousands of individuals to cash-in their final salary pension pots - also known as defined benefit (DB) schemes - which could spell disaster for their retirement plans
Individuals are being offered lump sums worth anything up to 40 times the value of the annual pension payment that they would receive if they remained in their defined benefit (DB) pension.
Figures from The Pension Regulator reveal that an estimated 80,000 people transferred out of final salary schemes between April 2016 and the end of March 2017, with the number expected to rise in the future.
A transfer value, also known as a ‘Cash Equivalent Transfer Value (CETV), is the cash amount available for individuals to transfer from their final salary pension into an alternative pension which will allow them to drawdown their money as and when they wish once they are 55.
Clearly, someone being offered £800,000 as opposed to £20,000 a year in retirement (40 times) is tempting, but it carries risk, as there is no guarantee that future income needs will be met unless the transferred money is managed well.
Even though financial advice must be sought to transfer a final salary pension if its value is £30,000 or above, there is no requirement to take advice on what to do with the money once the transfer has been made to an alternative pension. Ongoing financial advice may be needed if the pension pot is going to be managed effectively over what may be 30 years in retirement.
Almost a third (30%) of drawdown plans have been purchased without financial advice since the pension rules changed and ‘pension freedoms’ were introduced in April 2015. This compares with just 5% prior to the changes.
Jonathan Watts-Lay, Director, WEALTH at work, a leading provider of financial education, guidance and advice in the workplace, says the spike in numbers is concerning.
He comments; “It’s alarming that such a staggering number of individuals have taken such a monumental decision without taking appropriate, financial advice to ensure that their perceived windfalls will last the duration of their retirement, which could in reality be more than 30 years.”
”The drawdown scheme market is a minefield in light of the huge differences between scheme structures and the fees that they charge individuals, which is why specialist financial guidance and advice is crucial.”
Watts-Lay continues; “It really is utter madness for individuals with sizeable pension pots. You wouldn’t invest in a top of the range kitchen and attempt to fit it yourself if you didn’t have the expertise, so why would you consider toying with your retirement savings without taking specialist advice that considers your holistic financial position, including not just your pension but other savings such as Individual Savings Accounts, which can play a valuable part in tax efficient income generation in retirement.
Worse still, we have seen evidence of individuals having taken money out of their tax efficient pensions to invest in taxable savings or, equally alarming, in low interest cash accounts offering little, if any, growth potential.
The Pensions and Lifetime Savings report, Pension Freedoms: No more normal, January 2016, reveals that 51% of the estimated 400,000 defined contribution savers have taken cash lump sums in some format, which equates to 204,000 individuals. Of these, 57% chose to save or invest their cash and 19% saved or invested it all, with the majority (23%) having opted for a savings account and 18% a current account, which currently offers little by way of a return.”
Watts-Lay comments; “The pensions industry, by its own admission, has lost the trust of many individuals, due in part to the numerous pension crises to have hit the headlines. It is therefore unsurprising why so many individuals believe that the industry is not to be trusted with their hard-earned cash and feel such a desperate need to cash in their pension pots and take control of their own finances.
However, sadly, few people have the expertise to do this, which means that we are likely to see a great number of individuals make poor decisions and potentially struggle to make ends meet in their retirement as they struggle to make their cash last, even with the best will in the world.
The pensions industry needs to work together with employers to ensure that employees are receiving appropriate and timely guidance and support around the decisions that they are making about their retirement.
Employers are perfectly placed to provide their employees with access to a breadth of financial education, guidance and advice from industry experts who can help drive informed decisions that cut through the transfer value hype and actually make pension pots stretch further.”
Reward and WEALTH at work are blogging about financial education, savings and retirement options. FOLLOW THE SERIES HERE