Pensions, we never used to like talking about them. But it seems we can’t get enough of pensions these days, with hardly a week passing without retirement hitting the front pages.
So what’s causing all the fuss? Major changes to UK pension rules two years ago have created far more interest in retirement savings than ever before. The so-called Pension Freedoms of 2015 gave retirees in UK full flexibility over how they spend their pension pots.
Prior to the Pension Freedoms, most retiring each year would use their pension savings to buy an annuity, which pays a secure retirement income for life. But the 2015 changes meant retirees no longer had to buy an annuity, and they could spend their pension pots as they wished, including blowing it in one go on a luxury sports car. The pension freedoms have radically changed the choices many are making, with more than 10 billion pounds on lot from pension pot since 2015.
But very little of this cash has been spent on Lamborghinis or annuities. Instead pension money has been moved into riskier stock market based pension accounts, or it’s being used to pay down debt, help adult children onto the property ladder, or for home renovations. But much is also being moved into cash accounts, which pay little interest.
With many retirees shunning annuities, concerns are growing that retirees will run out of cash in later life. The pension freedoms have made it more attractive for savers to do the previously unthinkable and cash in a company final salary pension. These pensions, also known as defined benefit, are considered gold plated, as they promised to pay a secure indexed retirement income for life, typically based on salary and length of service. These pension promises, which are backed by employers, are increasingly rare in the private sector.
But over the past year, more than 80,000 have chosen to trade their valuable final salary pension for a cash lump sum today. Many have been tempted by record life changing offers, often six and seven figure sums. But being able to take cash as and when they wish, and pass on their pension pots to heirs, tax free if they die before age 75, are some of the other reasons why DB pension transfers have also become popular.
The recent surge in pension transfers is also good news for thousands of businesses, including many FTSE 100 firms, which are on the hook for these pension promises. Their pension liabilities, which mount to trillions, ease when pensions are paid as a lump sum rather than paid as a pension. Since 2015, it’s estimated around 50 billion pounds has flowed out of company retirement schemes through pension transfers. But the recent surge in transfer activity has worried the city financial regulator, which is concerned some may have been poorly advised to give up their gold plated company pension.
For some, transferring a DB pension may be a logical, a life planning decision. However, it’s a decision that some may come to regret, if their pension cash runs out.