THE LOWDOWN... ON PENSIONS

One of the unintended consequences of the pension freedoms is that workers with defined benefit pensions – those that pay a guaranteed income for life – are being tempted to transfer into more flexible defined contribution schemes.

Around 80,000 transfers took place last year, and that’s expected to keep rising as workers get offered sums 30 times the yearly income they would have received.

While the large sums being offered will appeal, and may be right for some, there are pitfalls and many people will be better off staying put. We look at the pros and cons of swapping a guaranteed lifetime income for a more flexible option.

PROS

Flexible access to savings from age 55, particularly useful for anyone in ill health. Possibility of a bigger tax-free lump sum. You could pay less tax if you’re smart when you take cash.

Unused pensions can be passed to anyone you choose, rather than just a spouse or partner.

CONS

If this is your only pension, you risk having to rely on the state pension alone if you spend the cash too quickly. No certainty over your retirement income or an income for your spouse or partner on your death. Many DB schemes pay them a 50% income. For pots over £30,000, you must get specialist advice. This can be pricey – either a fixed fee or percentage of your fund. There’s a risk to transferred pensions as funds can go down as well as up. A guaranteed lifetime income shouldn’t be snubbed without very careful consideration. These schemes were dubbed the golden handshake because they paid out generous amounts based on salary and length of service rather than the amount saved in.