Financial service regulators are becoming concerned about the risks consumers are taking with their pensions. Pension freedoms that were introduced a few years ago have led to a huge increase in the number of people transferring out of guaranteed pensions into riskier personal pensions.
The regulator has again expressed renewed concern about these transfers. They are worried that members of defined benefit pensions, also known as final salary schemes, are giving up valuable guarantees of a regular, often increasing, income every year for a promise of more tax-free cash, and earlier access to their money.
It’s a valid concern. Many pension scheme members would rather think that they had a fund worth half a million pounds in their pension rather than the promise of twenty thousand pounds a year for the rest of their lives, even if that fund is invested in a stock market that’s volatile and could lose much of its value if we suffer a prolonged bear market.
For most pension scheme members the guaranteed income is a better option, and in fact the FCA tells advisers that leaving the money where it is should be seen as the default position when scheme members ask them about a transfer.
Having said that there is no question that for some pension scheme members a transfer could be in their interest. Members who are ill, and who may have a shortened life expectancy, for example, might benefit from the flexibility of a lump sum that they can access while they can still use it. Likewise pension scheme members who have no spouse or partner to claim a dependent’s pension on death, or no children who would qualify for a dependent pension, might be better off with a personal pension arrangement where the fund value can be paid to a beneficiary of the member’s choosing.
But the bottom line is that any real decision can only be taken after a careful and detailed examination of all of the relevant facts and after a rigorous comparison of the benefits available under the final salary scheme and those available after any proposed transfer. And the investigation should always be carried out by an adviser with the relevant qualifications and experience.
A version of this article appeared in The Daily Record in March 2018.