How savers are being blocked from cashing in gold-plated pensions...

Alarm as firms say value of final salary plans has nearly HALVED if you want whole pot at once

SAVERS are being blocked from swapping their ‘final salary’ pensions for cash, after the amount they can receive by transferring retirement savings plummeted to record lows.

The sum you can take by transferring out of a gold-plated defined benefit pension that pays a regular income has plummeted by 42 pc, driven by former Chancellor Kwasi Kwarteng’s ill-fated mini-Budget last month, which created sudden jumps in government bond yields, known as gilts.

A final salary pension worth £775,112 in January 2022, paying out £30,000 a year, is now worth £447,175, according to data analysts XPS Pensions. Similarly, a final salary pension worth £258,926 at the start of the year, paying out £10,000 annually, has fallen to £149,954.

Final salary, or defined benefit pensions, pay an income in retirement based on years of service and your salary. By contrast, defined contribution pensions are like a pot of cash you can dip into whenever you want after age 55. And with some households struggling to make ends meet, more people are being tempted to tap any cash reserves they have.

Some pension schemes have temporarily suspended transfers after the mini-Budget sent financial markets into a tailspin, says Mark Barlow, of XPS Pensions. This means many savers have lost the ability to access their life savings flexibly.

Switching from a defined benefit pension to a more modern ‘defined contribution’ pot gives far more flexibility, but comes at a greater responsibility and risk. Those who transfer forgo their guaranteed income in favour of a pot of money, which is typically invested in stock and bond markets.

From age 55, they can take as much of their savings as they like, when they like.

TRANSFER values typically fall when gilt yields rise, as this means the cost of paying the final salary pension for firms becomes more expensive.

‘I expect most pension schemes would have suspended them at the back end of last month because values have been moving so dramatically,’ Mr Barlow says.

‘This will be alarming to many when they have seen the value of their life savings fall so much in a matter of months.’

David Brooks, of consultancy Broadstone, says transfer values could remain suspended for weeks. ‘It’s all unprecedented — we have never seen transfer values move at these speeds before,’ he adds.

Younger pensioners have been hit the hardest, with those aged 55 losing up to half their cash-out lump sum, he adds.

The steep fall reflects the fact investors can earn far more on government bonds than they could a year ago.

Kerry Lindsay, of pensions consultancy Hymans robertson, says there is a real risk that pension schemes quote transfer values that are immediately out of date, due to the large swings in markets. The cost of borrowing fell on Monday on the back of rishi Sunak’s appointment, as investors were reassured over rising debt. The yield on ten-year bonds fell from more than 4 pc to 3.75 pc.

Pension providers must honour transfer values for three months after their issue, meaning savers could be paid more than they are due if values continue to fall.

‘Typically, transfer values can be suspended for up to three months without breaching any disclosure requirements. But this can lead to a build-up of quotations further down the line,’ Ms Lindsay adds.

Louise Keeley, 54, from Staffordshire, was shocked to find a quarter of the value of her pension had disappeared in a matter of weeks.

She’d been told she could receive a lump sum of £202,485.01 if she transferred out of her £6,894-ayear NatWest pension on June 3, 2020. But by August 2022, this had fallen 23 pc to £155,946.64.

The dramatic drop has dashed her plans to cash out on her pension. She says: ‘I can’t believe how much my transfer value has gone down. It’s probably in my best interests to just leave it alone.’

Those who choose to stick with their defined benefit pension will see no change in their promised annual retirement income.

‘It just shows how much markets can fall, and I now see the value in remaining in a scheme that has guaranteed payments from the age of 60,’ adds Louise.

She says she will monitor her pension and reconsider cashing out if the value recovers.

But she may have to wait a long time. Simon Torry, of financial advisers SRC Wealth Management, warns that levels may never fully bounce back.

‘Values were at record highs last year and it will take a while for them to recover. We could be talking several years, if ever,’ he says.

However, those who do transfer could potentially make their money back by investing if stock markets recover. ‘Stock markets have been battered this year, with some falling up to 20 pc, so anyone entering the market now could be buying at discounted prices.’

RECENT turmoil in the pensions industry could also increase the risk of scams, warns Mr Brooks. ‘ Headlines around pensions going insolvent and people losing their savings will be heavenly for scammers. They will be using that when they call vulnerable pensioners, telling them to transfer before it’s too late,’ he says.

The threat of pension fraud has spiked, with a record 97 pc of transfers made in September flagged as suspected scams.

The number of pension scam alerts has nearly doubled since January, when just one in two raised suspicions, according to XPS Pensions.

Pension providers have the power to deny transfers where red flags are raised and there are concerns that customers are handing over their savings to criminals, after the Government introduced new rules last year in a crackdown on pension scams.

While such fraud remains a real risk, the number of red flags may be artificially high because of the new framework introduced last november.

Overseas investments were the most common cause of concern.

Anyone who transfers a defined benefit pension worth more than £ 30,000 must seek regulated financial advice.

Pension savers should be on guard for fraudsters, and there are several warning signs.

Scammers tend to be articulate and financially knowledgeable, with long reading materials and credible websites, according to The Pensions regulator.

They usually fleece the most vulnerable with attractive offers of high-risk investments, such as overseas property, parking, storage units or renewable energy bonds.