BIG DECISION 1
Should you switch a guaranteed pension for a lump sum?
RECORD sums are being offered to workers to entice them to quit defined benefit pension schemes and invest the cash in a personal pension.
Sums 40 t i mes an employee’s expected annual retirement income are being promised to some members, with £1 million-plus deals on the table for a lucky few.
But experts warn that such generous ‘ transfer values’ may not be enough to last the course of a saver’s retirement – and fear a mis-selling scandal in the making.
Since pensionn freedoms were i ntroduced ed t wo years ago demand nd has rocketed from om workers wishing ng to transfer from m a defined benefi t pension – based on how long they have worked for an employer and their salary – to a personal pension.
The new deal means retirement savers can tap into to a pension fund from the age of 55 – rather than being tied to the rules and retirement age of their old workplace set up, which often means they cannot start taking benefits until aged 65. But those in defined benefits schemes need to switch to personal pensions to achieve this freedom.
Thousands choose to transfer partly because personal pensions can now be passed down through the genera- tions rather than die with the owner – making them attractive for reducing the impact of inheritance tax. Andy James, head of retirement planning at financial adviser Tilney, says another attraction is that savers have more control over their investments. He says: ‘You will be able to control income levels within tax bands, such as taking higher income in the period before drawing your state pension pension.’ He also urges caution, adding:adding ‘You will lose the g guarantee you willwil never run out of income, as a defined benefit scheme pays out to you and your dependants for t he rest of your lives.’ Taking controlt of a pensionsi fund can be a ac curse as well as a ble blessing, as savers neednee to watch the markets tot ensure their cashh will ill lastl t the course. Pension funds have been driven to offer more generous transfers by a combination of rock bottom interest rates and gilt yields. With low interest rates, more capital is required to generate the income promised by the defined benefit scheme. Combine this necessity with the fact that certain pension schemes are