What would you choose – £24,000 a year from age 65 . . . or £849,000 now?
JUICY lottery-sized sums are being offered to savers to tempt them out of gold- plated workplace pension schemes and into personal plans. In some instances, such as with our case study Richard Smith, below, the lure of a near-£1million lump sum – instead of waiting for a guaranteed annual pension of £24,000 – is too appealing to dismiss.
But some experts fear such tempting amounts – sometimes even exceeding £1 million – may not be enough to compensate for giving up predictable retirement incomes promised by the original pension schemes.
The demand for transferring workplace pensions into private arrangements has shot up since new pension freedoms were introduced two years ago.
The rules changed so that savers in employer schemes can transfer to personal plans and access their funds from the age of 55 if they choose – rather than being tied to the rules and retirement age, often 65, attached to the old arrangement.
Another key advantage is that personal pensions can now be passed on to the next generation rather than die with the owner.
The employer schemes involved are ‘final salary’ defined benefit pensions ons where retirement i ncome e is based on how l ong a personson has worked for an employer yer and their pay. These are considered the ‘ gold standard’ ’ as the pension lasts as long as the scheme member lives.
Annual i ncreases to offset fset inflation are provided while le a spouse’s pension is also available. By transferring a pension,n, a saver has more control over their heir retirement money but loses all guarantees – and must accept cept more risk.
Typically the pension fundd is invested with future income ome taken by drawing down on the fund’s capital. The temptation tion to switch has grown i n the he last year as transfer values have soared to record levels.
This is because of a combination of rock bottom interestt rates and gilt yields. Mem- bers are offered a multiple off their promised income at retirement. This is usually between 20 and 25 times.
But since the Brexit vote, multiples of 30 are not untypical.
Stan Russell, retirement
income expert at Prudential, says he has seen a near seven- fold increase in transfer requests recently with some eye-watering deals coming to his attention.
He says: ‘The other day I saw an offer of £ 975,000 – or 37 times the expected pension. Scary numbers.’
Fiona Tait, business development manager at pensions firm Royal London, says savers should keep a check on the transfer value provided as part of their annual pension statement.
But she warns that those still working for a firm are usually better off remaining in the pension. ‘You will get employer contributions which are lost if you leave,’ she says.
These record transfer values may not last if interest rates rise.
BALLOONING SCHEME COSTS
THE mai n reason behind attractive pension transfer offers is the desire by employers to stifle the ballooning cost of their pension schemes as members live longer. By increasing transfer values, they hope members will leave. When I s obel Mullady retired last year, aged 60, after 39 years at a tyre manufacturer she transferred her final salary scheme. She sought advice from Donald MacLennan, of adviser firm Intelligent Pensions, after being offered a sum 31 times her expected pension.
Isobel, from Dundee, says: ‘I am single and did not want the pension to die with me. I would like to leave the money to relatives.’
Serious thought must be applied before giving up a defined benefit pension. Keith Richards, chief executive of the Personal Finance Society, says: ‘ Defined benefit schemes provide certainty, riskfree income and a degree of inflation protection. They should not be given up without significant research and financial advice, a requirement for transfers in excess of £30,000.’
Once a transfer has been completed, it cannot be undone.