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Cash for (UK)pensions deals warning
Giving up an inflation-linked final salary pension could be an expensive mistake.
Should you sell your pension? Photo: HOWARD McWILLIAM
By Teresa Hunter9:14AM BST 23 May 20111 Comment
Hundreds of thousands of over 55 year-olds could soon be offered bigger pensions than they expect, in return for giving up all rights to an inflation-proofed income in retirement.
A 56 year-old could boost a starting pension by more than 40pc, or a lump sum by half, while simultaneously helping companies slash their pensions bill by a third.
The pension division of accountancy firm PricewaterhouseCoopers has devised a new scheme called the new Total Pension Increase Exchange and said one of the UK's biggest companies is poised to launch, with other large employers set to follow.
This could trigger an avalanche of offers hitting doormats this spring and summer. However, Tom McPhail, head of pensions research at Hargreaves Lansdown, urges caution.
He said: "There is a risk that individuals will be seduced by jam today and as a consequence lose sight of making provision for tomorrow. If inflation averages 2.5pc, the value of your pension halves over 23 years. The retail prices index is currently over 5pc.
"Inflation-proofing is expensive, but it is expensive for a reason. Lay people underestimate the importance of making sure their pension keeps pace with the cost of living."
Indeed, anyone offered a package to surrender their rights to a fully or partially inflation-proofed final salarylinked pension, should exercise scepticism. But for a minority it may be the answer to a prayer.
Indexing a pension is a very expensive business, which is why fewer than three in 100 individuals buying their own annuity opt for full inflation proofing.
It is a luxury largely confined to members of final-salary schemes. Many trustees are obliged, by scheme rules, to uprate pensions annually by inflation up to 5pc. Where they are not, the law requires that pensions accrued between 1997 and 2005 match the rise in the annual cost of living up to 5pc and thereafter up to 2.5pc.
These laws and rules are a headache for employers, who face significant bills as a result. Off-loading even part of this obligation could have a dramatic impact on scheme funding, deficits and company balance sheets.
And it may not always be unattractive for members. By law anyone over 55 can start taking a pension from their scheme, or they can take a transfer value and make their own arrangements. Once they take their pension direct from the scheme, the indexation required by law cannot be sold.
PwC said this offers an opportunity for those between 55 and the company's normal pension age, particularly former employees or those facing early retirement, to take a transfer in a way which benefits them and the employer.
The company pays them an enhanced transfer value, which is more than the minimum they would be strictly entitled to, although less than the fully indexed pension is worth.
This enhanced financial pot is switched to a group personal pension, which is immediately used to "bulk buy" flat annuities, thereby, hopefully, achieving better terms for a group of members than individuals could negotiate on their own behalf.
The figures are impressive.
For example, a 56 year-old, in line for an early retirement pension of £5,100 with an annual cost of living increase, could swap that for an immediate £7,300 flat pension. But that sum would never rise.
There is even the prospect of a bigger lump sum. If the same individual stuck with his scheme, he could take cash of £24,300 if he lowered his pension to £3,700 annually. However, with the flat option you could take £37,200 cash and a flat pension of £5,500.
Similarly, a 60 year-old may have the choice of taking a £12,800 pension, or a £59,400 lump sum and a £8,900 pension with their scheme. Alternatively, under the Total Pension Exchange, he or she could either opt for an immediate pension of £16,700 or a lump sum of £78,100 and a £12,500 pension.
David Cule, principal at Punter Southall, said: "It's another option, which could be a good thing for some individuals. Whether it is, will depend on the state of your health, how long you expect to live, your marital status, what you think will happen to inflation and your need for cash now, as well, of course, on the terms you are offered."
Alan Howard, a pensions consultant for Aon Hewitt, said: "We are talking about a relatively small group of individuals for whom such an arrangement might be a good thing."
However, Raj Mody at PwC pointed out that when given the option of an index-linked annuity hardly anyone opts for it. He said: "We know many people prefer a bigger pension when they retire, so they can enjoy their early retirement while they still have good health."
But any members thinking of surrendering their cost of living pension increases should be clear that they are giving away a golden egg.
For example, that £5,100 pension with some indexation is worth £189,803. That is how much it would cost to buy at 56 from an insurance company.
The flat option, of £7,300, meanwhile would cost £138,757. In bald numbers, the company saves £51,000 and the individual is theoretically short-changed by a similar amount.
Whether you win or lose will depend largely on how long you live and the rate of inflation.
Watchdogs at both the Financial Services Authority and the Pensions Regulator have expressed concerns about schemes which "bribe" members to give up valuable pension benefits they may later regret.
They have introduced tight rules to ensure members are fully advised about the dangers of pension transfers.
Visit Telegraph Retirement Services for expert advice on Maximising Retirement Income
Giving up an inflation-linked final salary pension could be an expensive mistake.
By Teresa Hunter9:14AM BST 23 May 20111 Comment
Hundreds of thousands of over 55 year-olds could soon be offered bigger pensions than they expect, in return for giving up all rights to an inflation-proofed income in retirement.
A 56 year-old could boost a starting pension by more than 40pc, or a lump sum by half, while simultaneously helping companies slash their pensions bill by a third.
The pension division of accountancy firm PricewaterhouseCoopers has devised a new scheme called the new Total Pension Increase Exchange and said one of the UK's biggest companies is poised to launch, with other large employers set to follow.
This could trigger an avalanche of offers hitting doormats this spring and summer. However, Tom McPhail, head of pensions research at Hargreaves Lansdown, urges caution.
He said: "There is a risk that individuals will be seduced by jam today and as a consequence lose sight of making provision for tomorrow. If inflation averages 2.5pc, the value of your pension halves over 23 years. The retail prices index is currently over 5pc.
"Inflation-proofing is expensive, but it is expensive for a reason. Lay people underestimate the importance of making sure their pension keeps pace with the cost of living."
Indeed, anyone offered a package to surrender their rights to a fully or partially inflation-proofed final salarylinked pension, should exercise scepticism. But for a minority it may be the answer to a prayer.
Indexing a pension is a very expensive business, which is why fewer than three in 100 individuals buying their own annuity opt for full inflation proofing.
It is a luxury largely confined to members of final-salary schemes. Many trustees are obliged, by scheme rules, to uprate pensions annually by inflation up to 5pc. Where they are not, the law requires that pensions accrued between 1997 and 2005 match the rise in the annual cost of living up to 5pc and thereafter up to 2.5pc.
These laws and rules are a headache for employers, who face significant bills as a result. Off-loading even part of this obligation could have a dramatic impact on scheme funding, deficits and company balance sheets.
And it may not always be unattractive for members. By law anyone over 55 can start taking a pension from their scheme, or they can take a transfer value and make their own arrangements. Once they take their pension direct from the scheme, the indexation required by law cannot be sold.
PwC said this offers an opportunity for those between 55 and the company's normal pension age, particularly former employees or those facing early retirement, to take a transfer in a way which benefits them and the employer.
The company pays them an enhanced transfer value, which is more than the minimum they would be strictly entitled to, although less than the fully indexed pension is worth.
This enhanced financial pot is switched to a group personal pension, which is immediately used to "bulk buy" flat annuities, thereby, hopefully, achieving better terms for a group of members than individuals could negotiate on their own behalf.
The figures are impressive.
For example, a 56 year-old, in line for an early retirement pension of £5,100 with an annual cost of living increase, could swap that for an immediate £7,300 flat pension. But that sum would never rise.
There is even the prospect of a bigger lump sum. If the same individual stuck with his scheme, he could take cash of £24,300 if he lowered his pension to £3,700 annually. However, with the flat option you could take £37,200 cash and a flat pension of £5,500.
Similarly, a 60 year-old may have the choice of taking a £12,800 pension, or a £59,400 lump sum and a £8,900 pension with their scheme. Alternatively, under the Total Pension Exchange, he or she could either opt for an immediate pension of £16,700 or a lump sum of £78,100 and a £12,500 pension.
David Cule, principal at Punter Southall, said: "It's another option, which could be a good thing for some individuals. Whether it is, will depend on the state of your health, how long you expect to live, your marital status, what you think will happen to inflation and your need for cash now, as well, of course, on the terms you are offered."
Alan Howard, a pensions consultant for Aon Hewitt, said: "We are talking about a relatively small group of individuals for whom such an arrangement might be a good thing."
However, Raj Mody at PwC pointed out that when given the option of an index-linked annuity hardly anyone opts for it. He said: "We know many people prefer a bigger pension when they retire, so they can enjoy their early retirement while they still have good health."
But any members thinking of surrendering their cost of living pension increases should be clear that they are giving away a golden egg.
For example, that £5,100 pension with some indexation is worth £189,803. That is how much it would cost to buy at 56 from an insurance company.
The flat option, of £7,300, meanwhile would cost £138,757. In bald numbers, the company saves £51,000 and the individual is theoretically short-changed by a similar amount.
Whether you win or lose will depend largely on how long you live and the rate of inflation.
Watchdogs at both the Financial Services Authority and the Pensions Regulator have expressed concerns about schemes which "bribe" members to give up valuable pension benefits they may later regret.
They have introduced tight rules to ensure members are fully advised about the dangers of pension transfers.
Visit Telegraph Retirement Services for expert advice on Maximising Retirement Income
