DEFINED benefit pension schemes could face a Northern Rock-style run as members withdraw their money next month under new rules designed to give people full control of their pensions.
Actuary Gerry Devenney, head of Punter Southall in Scotland, says trustees must prepare for massive outflows which could seriously exacerbate deficits.
He said: “I’m having to tell the trustees that I advise ‘be careful here, there’s a chance of a run on your scheme’.”
He was speaking as the pensions industry gathered for an investment conference in Edinburgh, where one of the main themes was the upcoming “pension freedom” law. From 6 April, those aged 55 and over will be able to withdraw some or all of their pension pot as a lump sum.
When the change was proposed last year, pensions minister Steve Webb caused panic in the industry when he suggested people could use the windfall to buy a Lamborghini.
Devenney doesn’t expect there will be much uptake for that, as new cars lose value rapidly. But savings provider Scottish Friendly has warned there may be a surge in second home purchases, given the baby-boomer generation’s penchant for property. Devenney is more concerned that people in defined benefit schemes will be tempted to move their money to a defined contribution-style set-up that would give them more flexibility but potentially be more risky.
He believes some financial advisers will be unwilling to advise on such deals because previous pensions changes in the 1980s saw many “get their hands burned”. Many people will simply be put off taking advice because of the up front fees now required, he added.
One probable beneficiary of the tax freedom will be the new UK government in May, as withdrawals over 25 per cent will be taxed at the full rate. Devenney said: “In the short term it guarantees a huge tax take. There have been several estimates but it’s measured in the billions.”