There was a time when I would go to a dinner party, mention pensions, and be ostracised for the rest of the evening by my friends.
“Boring,” they would exclaim in unison while casually sipping from their glasses awash with life-enhancing Viognier. “How can you make a living from writing about such tedious things?” they would add before signing off with: “Get a proper job.”
I would disappear off into the night with my financial tail firmly between my legs. Maybe, I would think, I should have stuck with accountancy after all (my chosen career after university) or gone back to being a dustman with little responsibility (one of the most fun jobs I ever did).
But today, whenever I bring up the subject of pensions, my friends are animated and inquisitive. They are keen to hear my opinion and desperate for advice (I always point them in the direction of an independent financial adviser). Of course, they are now all a little closer to the day when they will retire and use a pension.
To them, pensions are no longer esoteric financial products, which suppressed their take-home pay. They are all-important – as is my pension knowledge that they previously scoffed at. How the tables have turned.
But their new-found interest in pensions is also fuelled by other factors. For a start, pensions are more political than ever, as evidenced by recent comments from the Chancellor, Philip Hammond, drawing attention to the value of pensions in the public sector. A pension, he says, ensures average public sector workers remain some 10% better off than private sector employees. This political debate has re-ignited people’s interest in pensions again.
Pension freedom rules, introduced just over two years ago, have also raised the nation’s awareness of pensions. Previously, many people walked into retirement with either the income provided by a pension annuity – or a ‘defined benefit’ pension determined by a combination of how many years they had worked for an employer and their final salary. That was it, pension set and match.
But the freedom rules have been a game changer. Most people now have greater flexibility over what they can do with their pension funds. They are no longer forced to buy an annuity or withdraw funds within set annual limits, which was invariably the case before for those with ‘defined contribution’ pension plans (where the value is determined primarily by the performance of the stock market). Now they can take income when it suits them.
More controversially, if they are a member of a defined benefit pension scheme provided by a private sector employer they no longer need to wait until they reach the scheme’s retirement age (typically 65) before obtaining an income. Instead, they can cash in their work pension and put the proceeds in a personal pension, giving them control over how and when (from age 55) they take income from it and how the money is invested.
In recent months, there has been a sharp increase in the number of people making such pension transfers. They have been tempted by some extremely attractive offers with transfer values equivalent to 30 times the annual income they would have got under their employer’s work pension. So a £30,000 retirement income promised under the defined benefit scheme could trigger a £900,000 transfer value. Tempting.
These big transfer values have been mainly driven by the desire of many employers to stifle the rising cost of running these schemes. Having closed them to new members or to further contributions, the next way to cut costs is to ‘bribe’ members to leave by offering a mind-blowing transfer value.
Good news? Of course. Should you be tempted? Maybe… although in transferring there are important guarantees you will end up losing; most crucially, a retirement income that will increase annually to take into account of inflation, and a reduced pension for a dependant if you die before them.
On the other hand, by transferring you will be firmly in control of your pension destiny. You will also remove any concern you might have that your employer may not be able to honour the pension it has promised you because of its own poor financial health – forcing you to rely on a reduced pension from the Pension Protection Fund (set up to protect people from failing pension schemes). It is a tough call, which is why the City regulator insists that anyone going down this road obtains robust financial advice.
All I will say is what I say to my friends: “Tread carefully, very carefully.”
Jeff Prestridge is the personal finance editor of the Mail on Sunday. He won the Contribution to Personal Finance Education category at the Santander Media Awards 2016. Email him at columnists@moneywise.co.uk. Read his previous columns.
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