Millions of pension savers not getting sufficient guidance
A report from LCP and Royal London found that savers who are no longer active members of the scheme (known as ‘deferred’ members) are often unaware of the different ways in which they can access the pension funds they have built up, including:
- Taking the pension early at a reduced rate or later at an enhanced rate
- Option to exchange some or all of their pension rights for a cash lump sum
- Option to transfer some or all of their pension out into a defined contribution scheme
- Option of higher initial pension to fill the gap between scheme pension age and state pension age
According to the research from the two firms, most occupational schemes have not significantly adapted the way in which they communicate with members and deferred members about how and when they can take their pension benefits, despite the introduction of the pension freedoms in April 2015.
It found that just 10% of schemes write to people well in advance of the normal pension age, instead leaving the first contact until they are approaching that age.
While most schemes have an option for deferred savers to take early retirement, four in five do not highlight this option to members, with communication generally arriving too late for members to make use of early retirement options.
What’s more, the majority of schemes do not quote transfer values in their retirement communications.
Jonathan Camfield, partner at LCP, said: “Members of occupational pension schemes do not need to have a one-size-fits-all experience with their pension. Most schemes already offer valuable flexibilities to re-shape their pension benefits within the scheme as well as options to transfer rights out into a different arrangement.
“Members need easier access to high quality and cost effective advice to help them understand what the options are and how to make the best use of them, and schemes should consider whether further options could usefully be offered and whether earlier and more effective communication can help.”
Switching away from a salary-related scheme isn’t so crazy
Final salary and average salary pension schemes are sometimes referred to as ‘goldplated’ pensions, and have traditionally been seen as the best form of pension around. The idea is that the final pension you enjoy is based on your salary for the employer and your year’s of service.
For example, your employer might offer a final salary scheme where you enjoy 1/60 of your final salary for each year of service. If you work for that firm for 20 years and finish with a salary of £60,000, then your income in retirement from this pension will be worth £20,000.
These schemes are extremely expensive for employers though, which is why they have mostly disappeared – research from Mercer earlier this year suggested that the combined final salary deficit of the FTSE 350 firms more than trebled in 2016 to reach £137bn.
Despite the security offered by these defined benefit pension schemes, interest in transferring to a defined contribution scheme has grown. A defined contribution scheme is where employee, employer and the government all pay in to the pension pot, which is then invested. The final pension pot you finish with depends on the performance of your investments and the level of your contributions.
There are a host of reasons why interest in transferring money from a defined benefit to a defined contribution scheme is on the up. For starters, the pension freedoms can only be utilised by savers with a defined contribution pension; the added flexibility is seen as a price worth paying for by some savers.
In addition, the transfer values on offer have increased significantly over the last year. Pension firm Xaffinity monitors the transfer value which would be provided by an example DB scheme to a member aged 64, who is entitled to a £10,000 yearly pension, starting at 65.
In June 2016, that pension saver could get £210,000 when transferring their pot, but today that has jumped to £230,000. Earlier this year it increased to as high as £241,000.
If you have any money in a salary-related scheme, it’s well worth speaking to a financial adviser about your options. Indeed, such a consultation is mandatory if your defined benefit pension is worth more than £30,000.
See YourMoney.com’s The case for and against transferring out of your final salary pension for more information.