A recent discussion with a 30-something-year-old who had moved to a new company revealed that he had been forced to cash in his pension fund even though he wanted to preserve the money.
The lack of cooperation by his former employer had made it just too difficult. He was further confounded by finding the appropriate investment vehicles for his funds.
So cashing in, paying the tax and transferring the money into his bond was just easier. Unfortunately, the long-term impact to his retirement savings will be significant, reducing his pension income by about a third.
It is exactly this scenario the Treasury is hoping to address with its new proposals.
While an employee now needs to receive financial advice to preserve their funds, under the new proposals they would be required to receive advice before cashing their policy in, ensuring they fully understand the long-term implication of their decision.
Furthermore, by insisting that the former employer provide a paid-up certificate that the new employer is obliged to request from the new employee, the onus will be on the employer to assist the employee to preserve the funds. It will also make it easier for individuals to consolidate their funds and prevent the current situation where they have multiple preservation funds, incurring high costs and further administration fees.
From an employer’s perspective, the amount of upheaval to meet these requirements will depend on the fund structure. Employers who use umbrella funds, which pool the retirement investments of multiple employers, may find that the default preservation structure is already in place. For employers with stand-alone funds, changes to the fund rules would need to be made.
Currently, depending on which fund you speak to, the rate of preservation is about 10% to 30% – the younger the employee is, the more likely they are to cash in their retirement fund. In its earlier papers, the Treasury indicated that it would wait to see the outcome of incentives to preserve retirement funds before considering compulsory preservation.