Juicy lottery-sized sums are being offered to savers to tempt them out of gold-plated workplace pension schemes and into personal plans.
In some instances, the lure of a near-£1million lump sum – instead of waiting for a guaranteed annual pension of £24,000 – is too appealing to dismiss.
But some experts fear such tempting amounts – sometimes even exceeding £1 million – may not be enough to compensate for giving up predictable retirement incomes promised by the original pension schemes.
See our example of a retiree age 62 with a wife age 50 and three children ages 27, 25 and 19.
In line for a £24,000 defined benefit pension from age 65, with annual increases of 2.5 per cent; a widow’s pension worth £16,000; and a dependant’s pension until the youngest turns age 23.
OFFER: A pension transfer value of £849,000 (35 times £24,000).
To help him make the right decision, Richard was provided with a ‘transfer value analysis report’ – a compulsory analysis for all those switching a fund worth £30,000 or more. It calculated that after charges, his pension investments would have to grow 4.2 per cent a year until age 65 to match the guaranteed pension from his employer.
DECISION: Being an ‘adventurous’ investor, he accepted the transfer value and switched to a personal pension.
REASON: Richard calculated he would have a guaranteed annual income of £14,000 through a combination of his state pension at 66, a personal pension and a small income from a separate final salary scheme that has been paying out since he was age 60.
Richard says: ‘This £14,000 is enough to meet my basic requirements. I now have £849,000 that I can start drawing money from at any time. As much as £212,000 can be in tax free cash, which was an important consideration as we hope to buy a small apartment abroad. With the final salary scheme I would have only been able to take £100,000 in tax-free cash and wait until 65 to access it.
‘My wife has her own pension so the need for a widow’s benefit was not important. And our youngest child is already 19 so the dependant’s benefit was losing appeal.’