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Changes to the pension rules – what they mean…

Cherry Reynard
Written By:
Cherry Reynard

The Treasury has confirmed that it will allow pension transfers from private sector defined benefit schemes to newly flexible defined contribution schemes as part of the new liberalisation of the pension rules.

Previously, the majority of people with a defined benefit scheme – where the amount received depends on final salary – would have rolled over into an annuity with the same provider. The Government is trying to stamp out anti-competitive practices such as enhanced transfer values and transfer incentives by allowing retirees to transfer out of their defined benefit scheme and into a defined contribution scheme, where they have more options at retirement, such as taking their entire pension pot as a lump sum.

However, experts believe that the majority of retirees will not transfer. Tom McPhail, Head of Pensions Research ‘We agree with the Treasury’s decision to allow private sector final salary pension transfers to continue. However our experience in this market shows that for the majority of scheme members the best advice is to not transfer. The cost of getting good advice will be hundreds or in some cases thousands of pounds, so investors should think carefully about whether they really want to give up their scheme guarantees before paying an adviser a fee to look into it for them.’

As part of the same initiative, the Treasury announced that it would provide free independent guidance from the Money Advice Service (MAS) and The Pensions Advisory Service (TPAS) on retirement. The guidance will be paid for by a levy on regulated financial firms. The amount of the levy has not been confirmed and the proposed guidance for retirees will not always be face-to-face, as first indicated, but could be provided online or by phone.

Alex Hoctor-Duncan, head of European Retail at BlackRock, welcomed the announcement: “Today’s announcements are a significant step forward in giving Britons choice and control over their financial future. The BlackRock Investor Pulse survey shows just 47% of Britons are currently saving for retirement but those who do are twice more likely to plan a holiday than reviewing their retirement plan. This reiterates that education on the importance of saving regularly and as early as possible remains a crucial element to developing a savings culture, and in ensuring the future of an effective retirement system in the UK.  Ultimately, putting money aside for your pension should be just like paying any bill on a monthly basis, the difference is this one will pay you back in the future.”

Fiona Matthews, a senior consultant at Towers Watson, said: “The Government never wanted to antagonise millions of people by trapping them in their current pension schemes.  Having been persuaded that its fears about the bond market were overblown, it doesn’t have to.  

“We do not expect a big overnight exodus from defined benefit pensions.  People will like knowing they have choices, but it is human nature to value what you have and not give it up lightly.  Most people will also want to keep their options open and not make their minds up until they are ready to retire. We expect that more schemes will now allow members to transfer out right up until the point of retirement, rather than requiring them to make their minds up a year beforehand.”

Action plan:

1) Unless you are on the brink of retirement, you do not need to take any hasty decisions
2) Seek advice. There are big sums at stake and the wrong decision could have a meaningful impact on your financial future.
3) Don’t take the first thing you are offered: An annuity may well be the right choice, but you need to weigh up your options.
4) Don’t be bounced into a decision: time is (usually) on your side.

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