Defined benefit pension transfer values ‘shooting up’
9 December 2016
- From the section Business
Six million people with defined benefit pensions have seen their transfer values shoot up in the last year, according to a big insurance company.
Under the rules of most defined benefit schemes, workers have the right to sell their pensions back to their employer.
According to the insurer Royal London, the cash that such people can get has soared over the last 12 months.
It says some are being offered “eye-watering” sums, often tens of thousands of pounds more than a year ago.
For someone with a pension income worth £20,000, it is not uncommon to be offered 30 times that amount – in other words, £600,000 in cash.
But while selling the rights to a defined benefit (DB) pension may be useful for many people, Royal London is also warning that there can be significant disadvantages.
After working for 30 years for a credit card company, Paul Osborne, from Southend in Essex, got made redundant.
But afterwards, he found it hard to get another job and found himself living on benefits.
As a result, he was advised to sell his DB pension.
In 2014, he was offered a cash sum of £505,000 for it. A year later, that amount had jumped by 12%, to £567,000, an amount he accepted.
He then reinvested the sum in a drawdown pension, which currently pays him £25,000 a year.
“It has taken so much pressure off my shoulders, and I am a lot more happy,” he told the BBC.
“It has given me my life back; I can’t recommend it enough.”
What is a defined benefit pension?
Workers with defined benefit pensions know exactly how much they will receive in retirement. Such schemes are either based on a worker’s final salary, or on their career average.
Workers with defined contribution (DC) schemes save into a pension pot, which they then use to buy a retirement income. The size of the pot depends on stock market performance.
The reason for the increase in transfer values is continuing low interest rates.
Pension schemes depend heavily on bond yields for their income, and with yields at record lows, many are struggling to meet their commitments to pay future pensions.
So they have been offering larger and larger sums to people who are prepared to give up their pension rights.
Royal London says selling DB pensions can offer:
- A more flexible retirement income
- The possibility of extra tax-free cash
- Easier inheritance, as transferred funds can be passed on to heirs
But it also warns that keeping a DB pension is sensible for many people, as they offer:
- Certainty. Such pensions pay an income for life
- Inflation protection
- Risk-free income, which does not depend on the ups and downs of the stock market
However, current rules mean that those selling their DB pensions have to sell the whole lot.
Steve Webb, a former pensions minister, now director of policy at Royal London, believes workers should be able to sell any proportion they wish.
“A new right for workers to ‘slice and dice’ their company pension, leaving some as regular income, and taking some as a cash lump sum, would offer new options,” he said.
This post was written by FSB News