So, we are a few months on from the start of the new defined contribution (DC) ‘pension freedoms’ originally announced in the 2014 Budget. Despite all the media coverage, and the reports of an initial surge in enquiries, it appears the mass cashing in of pension savings hasn’t happened. Exotic car dealers are still waiting for that massive boost in sales!
There are a few reasons why the anticipated flurry of activity hasn’t materialised. For some, the tax consequences may have put them off. Others will have had their plans hampered by the fact some schemes and pension providers are not offering direct access to the new pension flexibilities. I think it is the need to transfer to a different arrangement and the charges involved to make use of the new options that are the real limiting factors. Pension transfers have effectively ground to a halt for members with larger defined benefit (DB) pensions.
The legal requirement for a member to take financial advice for transfers from DB to DC of £30,000 or more and for pension trustees to check the member has received that advice from a suitably qualified individual financial adviser (IFA) may be sensible protections. However, in reality, many IFAs do not want provide transfer advice for what, to them, is a hot potato. The fear advice not to transfer will be ignored, and the risk of comeback from members and/or regulators in future, is simply too great. Although some IFAs are willing to provide transfer advice, a thorough review and recommendation comes at a cost; and it is a cost many individuals are not willing to pay.
There’s another side to this halt in transfers: members are being protected from moving to ‘pension liberation’ schemes. This is very beneficial. Well, it is for people with larger pension pots.
With no requirement to take advice before transferring pots less than £30,000, members with lower levels of pension saving are more exposed to the risk of transferring to a liberation scheme. Arguably, these members are the most vulnerable and would benefit from greater protection. They may also be the individuals most likely to feel that cashing in their pension is the right thing to do.
As pension trustees, we need to do all we can to ensure all members properly understand the options and risks they face.
You can read more about my thoughts on the new pension flexibilities in the article on our website.
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