Retirees lured by sky-high pension transfer values
Pension transfer values are determined by the prevailing government bond yield, as well as other factors such as length of service, final salary and the scheme itself. Record low government bond yields have seen people being offered up to 40x the value of the pension income they would receive on retirement.
Figures from the Pension Regulator show that an estimated 80,000 people transferred out of final salary schemes between April 2016 and the end of March 2017, with the number expected to rise in the future.
The sums involved can be tempting. A lump sum of £800,000, rather than an income of £20,000 a year in retirement is attractive, but it leaves retirees at risk that they will run out of money. If a retiree has no other sources of income, that money needs to be invested to create an income and with interest rates at all-time lows, that isn’t easy. There are also concerns that investors are selling out and then leaving the money in cash, not protected from inflation.
Even though retirees must seek advice to transfer a final salary pension if it has a value of £30,000 or above, there is no requirement to take advice on what to do with the money once the transfer has been made to an alternative pension. If the pension pot is going to remain invested over 20-30 years, retirees may need ongoing advice on how to invest it.
Almost a third (30%) of drawdown plans have been purchased without financial advice since the pension rules changed and ‘pension freedoms’ were introduced in April 2015. This compares with just 5% prior to the changes.
Jonathan Watts-Lay, director at financial education provider WEALTH at work, said the spike in numbers is concerning: “It’s alarming that such a staggering number of individuals have taken such a monumental decision without taking appropriate, financial advice to ensure that their perceived windfalls will last the duration of their retirement, which could in reality be more than 30 years.
He described the drawdown market as a ‘minefield’ with huge differences between scheme structures and the fees that they charge individuals. He added: “It really is utter madness for individuals with sizeable pension pots. You wouldn’t invest in a top of the range kitchen and attempt to fit it yourself if you didn’t have the expertise, so why would you consider toying with your retirement savings without taking specialist advice that considers your holistic financial position, including not just your pension but other savings such as ISAs, which can play a valuable part in tax-efficient income generation in retirement.
“Worse still, we have seen evidence of individuals having taken money out of their tax efficient pensions to invest in taxable savings or, equally alarming, in low interest cash accounts offering little, if any, growth potential.”
The pension transfer market has attracted the attentions of the financial services regulator, the Financial Conduct Authority (FCA). It found that advice in more than half of the defined benefit pension (DB) transfers where the recommendation was to move the retirement pot was unsuitable or unclear. It will publish a policy statement in the first quarter of 2018.