Race to cash in pension pots could spell retirement disaster

Says expert

Bumper pension scheme transfer values are luring thousands of individuals to cash-in their final salary pension pots – also known as defined benefit (DB) schemes – which could spell disaster for their retirement plans. 

Individuals are being offered lump sums worth anything up to 40 times the value of the annual pension payment that they would receive if they remained in their defined benefit (DB) pension. 

Figures from The Pension Regulator reveal 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. 

A transfer value, also known as a ‘Cash Equivalent Transfer Value (CETV), is the cash amount available for individuals to transfer from their final salary pension into an alternative pension which will allow them to drawdown their money as and when they wish once they are 55.

Clearly someone being offered £800,000 as opposed to £20,000 a year in retirement (40 times) is tempting, but it carries risk, as there is no guarantee that future income needs will be met unless the transferred money is managed well.

Even though financial advice must be sought to transfer a final salary pension if its value is £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. Ongoing financial advice may be needed if the pension pot is going to be managed effectively over what may be 30 years in retirement.

Almost a third (30 per cent) 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 per cent prior to the changes. 

Jonathan Watts-Lay, Director, WEALTH at work, a leading provider of financial education, guidance and advice in the workplace, says the spike in numbers is concerning. 

He comments; “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.