Cash for gold?
WOULD YOU CONSIDER JUMPING OUT OF A ‘GOLD-PLATED’ PENSION? VICKY SHAW INVESTIGATES
GOLD-PLATED pensions that promise savers a certain level of income when they retire are highly-prized and increasingly rare. But recently, there’s been a surge in people looking to exchange the promise of a regular pension in retirement for a large amount of money.
Here’s a look at what’s been happening – and why the pros and cons should be carefully weighed up.
WHAT ARE THE DIFFERENT PENSION TYPES?
DEFINED benefit (DB) pensions are often described as gold-plated because they guarantee holders will end up with a certain level of pension income – such as final salary pensions.
But they have increasingly been replaced by defined contribution (DC) schemes, as firms have found DB schemes expensive to run as people are living longer and spending more years in retirement.
While gold-plated DB schemes offer a set retirement income, savers in a DC scheme generally bear the risk of how much retirement income they’ll eventually end up with.
WHAT’S CHANGED RECENTLY?
THE pension freedoms, introduced in 2015, allow over-55s with DC pensions to have much more flexibility than they had previously over how they use their pension pot. Whereas previously they may have been required to use their pot to buy a retirement income called an annuity, now they have a much wider range of options. This widened level of choice may increase the attractiveness of DC schemes.
WHAT ARE THE PENSION TRENDS?
RESEARCH from Royal London among more than 800 financial advisers found a big increase in transfers out of final salary pensions.
There are big sums involved too. Royal London found a growth of more than 50% in the volume of transfers out of final salary pensions taking place in the last year, with the most common transfer value lying in the £250,000 to £500,000 range.
One in four advisers reported most of the transfers they deal with are worth 30 to 40 times the annual pension foregone.
Common reasons for transferring included the ability to take a more flexible income in retirement, inheritance considerations and to take money earlier.
Advisers also reported on the main reasons which they give for recommending against a transfer.
Concerns included losing the certain income from the final salary scheme, the risk associated with the transfer was not appropriate for the client and the proposed transfer value represented poor value.
WHAT COULD THE PROS AND CONS BE?
WITH such highly-prized benefits, it’s important for savers to think very carefully beforehand about what they would be giving up. Making the most of independent financial advice could be key.
Baroness Ros Altmann, a former pensions minister, says it is vital to get good advice first. She says possible reasons for someone transferring could include:
They have several DB pensions and could transfer some and still have a guaranteed income.
They are in poor health and fear dying young.
They have very large debts and the money could help pay them off.
They are comfortable with managing money or finding someone to do that for them.
They want a fund to help pay for care if needed.
On the other hand, reasons someone may want to stay put in a gold-plated scheme could include:
They are worried the decision is irreversible and they might regret it.
The scheme is their only pension.
They value the peace of mind of a guaranteed regular income.
They are concerned about inflation and have an inflationlinked DB pension.
They don’t want to take an investment risk.
WHAT ELSE SHOULD SAVERS CONSIDER?
AS well as thinking the decision through carefully and getting appropriate help, savers should also beware of pensions and investments scams.
The Financial Conduct Authority (FCA)’s website has tips to spot signs of fraud at scamsmart.fca. org.uk
The FCA also lists authorised firms at fca.org.uk/firms/financialservices-register