News & Views

Is it time to cash in on your pension?

11th July 2017

Article in Sunday Herald 25 June by Margaret Taylor, Personal Finance Editor


Former chancellor George Osborne’s changes to pensions in 2015 has allowed anyone aged 55 or over to withdraw money saved in their workplace scheme to fund their retirement when they want

Thanks to pension freedoms introduced by former chancellor George Osborne in 2015, anyone aged 55 or over has been able to withdraw money saved in their workplace scheme to fund their retirement exactly as they please.

While the rules apply only to money-purchase schemes – the kind where you and your employer pay in during your working life before you use the money saved to fund your retirement – those in defined benefit (DB) schemes have been getting in on the action too.

This has been possible because members of these more commonly known final-salary pensions – which see employers pay retired employees a proportion of their leaving salary for life – can transfer their pot into a money-purchase scheme before taking all or some in cash.

Such deals have been all the rage in the last year thanks to transfer values soaring in the post-Brexit vote environment. Transfer values, which equate to the total amount a company believes it would have to pay to honour a pensioner’s benefits for life, are calculated in part with reference to the yield on long-term government bonds.

These fell sharply in the wake of the Brexit referendum, prompting transfer values to move dramatically in the opposite direction.

It is little wonder, then, that on receiving their transfer value in their annual pension statement many members have been looking to cash in. The practice has been frowned upon by industry watchdog the Financial Conduct Authority, however, whose guidelines stipulate that financial advisers must always begin their advice from the position that a transfer would be an unsuitable option for every client.

Until now, that is. As part of a consultation unveiled this week the regulator is proposing that advisers should now tailor their advice to individual client needs rather than assuming a transfer will be wrong for everyone, with the emphasis given to what they are giving up by abandoning a guaranteed income for life. So why the change of heart? Jeff Lewis, a financial adviser at Edinburgh-based RobMac, feels the move is reflective of the regulator catching up with Osborne’s pension freedoms, which have now been in place for over two years.

“There’s been a lot of industry pressure with the big pension providers, who have been doing a lot of DB transfers, saying the regulatory advice isn’t quite fit for purpose because it doesn’t fit with the new pension freedoms” he said.

Indeed, the regulator admitted as much when announcing its consultation with its executive director of strategy and competition Christopher Woolard noting the body “recognises that the environment has changed significantly, so we want to ensure that financial advice considers the customer’s circumstances in full and recognises the various options now available to them.”

The issue is that for some people DB transfers do make sense, especially at a time of heightened transfer values. “I had a client who would have received £15,000 a year from their pension or a pension fund of £530,000.” Lewis said. “That’s changed the debate – if the fund was £300,000 you wouldn’t even go there.”

Andrew Tully, pensions technical director at Retirement Advantage, noted that being able to turn pensions wealth into inheritable wealth could also make a DB transfer a viable option.

“The ability to pass unused pension wealth to your family is a strong driver for many people, especially when contrasted with the often poor level of death benefits available to those who have a final salary benefit with a previous employer.” he said.

“Similarly, those who are single, widowed or divorced may benefit from the ability to reshape death benefits to suit their individual circumstances.”

Does that mean that anyone in receipt of attractive-looking transfer value should be rushing out to cash it in, though? Probably not.

As Woolard at the FCA said: “Defined benefit pensions and other safeguarded benefits such as guarantees are valuable so most consumers will be best advised to keep them.”

For anyone who does want to investigate giving them up, James Walsh of the Pensions and Lifetime Savings Association said the additional safeguarding being mooted by the FCA should ensure people do not make decisions that ultimately harm their financial wellbeing.

“These proposals go a long way towards ensuring savers understand the losses they could suffer by leaving defined benefit schemes,” he said.

“We know that transferring out of a defined benefit scheme may not be in the members’ interest. The new comparison, which highlights the benefits being given up, will help to focus members’ minds.

“Defined benefit pensions provide scheme members with a guaranteed income for life, irrespective of how long their retirement might be. It is essential this guarantee is not given up without serious consideration and appropriate financial advice is taken before any decisions are made.”