Jeff Salway: Taking a gamble with your pension

Although the new rules do not allow freedom for final salary scheme pensions, they can be transferred and then cashed in, a move that many experts say is a highrisk gamble. Picture: Getty

More savers than expected are putting their retirement incomes at risk by quitting generous final-salary schemes to take advantage of new pension access rules, early evidence suggests.

Pension trustees, providers and advisers have all warned that they are getting even more enquiries than anticipated from members of defined benefit (DB, or final-salary) schemes looking to transfer out so they can cash in their pension pots.

The trend has emerged just weeks after new rules took effect allowing members of defined contribution (DC) schemes to take their entire pension pot as a cash lump sum (including up to 25 per cent tax-free and the remainder taxed at their marginal rate).

The pension paid to savers in DC schemes is variable, depending on factors including contributions and investment performance. The so-called “freedoms” don’t apply to DB schemes, where pension income is based on earnings and length of service and is therefore guaranteed.

However, the government has relaxed its rules to let members of DB schemes transfer to DC schemes so they can also access their pension pots. It was previously compulsory for anyone wanting to leave a DB scheme to take regulated advice, but people with a pension transfer value below £30,000 are now exempt from that requirement. The indications are that large numbers of people are considering cashing in their DB pensions, in a move considered highly risky.

Consultancy giant Mercer has seen an increase of 60 per cent over the past year in the number of employees asking how much their DB scheme would be worth if they transferred out.

Standard Life has noted “a significant increase in requests in the lead up to, and after, 6 April”, while fellow Edinburgh-based insurer Scottish Widows carried out 457 “transfer value analysis” exercises for advisers in the first three months of 2015, up 72 per cent from the corresponding period last year.

Robert Cochran, retirement expert at Scottish Widows, said: “We have seen an increase around DB transfers as a result of the pension freedoms with IFAs who are qualified in this area, and there is also evidence that some IFAs will now even revisit previous transfer requests to inform clients that the rules have changed.”

Advisers report similar trends. Jason Hemmings, partner at Cornerstone Asset Management in Edinburgh, said: “We have seen a greater number of enquiries regarding final-salary benefits, where people are looking to establish cash equivalent transfer values and seek financial planning advice.”

But while advice is essential on what can be a very complex decision, the risks involved deter many advisers from getting involved in DB transfers. Just one in four IFAs polled by the Association of Professional Financial Advisers said they were willing to deal with transfer requests. Those steering clear point to uncertainty around the regulatory implications.

Carl Melvin, director of Affluent Financial Planning in Paisley, said: “This is high-risk from a technical perspective as the analysis and rationale for advising a course of action is highly individual and is not solely based on the numbers.”

One of his biggest concerns is being vulnerable to claims from clients who decide further down the line that they made the wrong decision.

“There is little clarity to say ‘do it this way and you will be protected from a claim’,” said Melvin. “It is left on the basis of we will look at it after the poor outcome has occurred and then decide whether it was suitable advice or not.”

Many people cash in their DB schemes even when they’ve been advised not to, the Financial Conduct Authority said last year, due partly to the rise of cash incentives offered by employers desperate to cut costs.

There are some instances in which transferring out can make sense, such as where health issues threaten to shorten your retirement or there’s no-one to pass the pension on to at death. But in the vast majority of cases, DB members are advised to keep their cash where it is and benefit from a guaranteed income in retirement that they’d struggle to secure elsewhere.