Employers short-changing workers in cash for pension swap
Employees shouldn’t be encouraged to transfer out of generous defined benefit pensions.
Unscrupulous employers are using changes to the retirement rules to short-change workers by offering them lump sums in place of their pension.
The excitement around the relaxation of the pension rules to give retirees access to their entire pension pot as cash has led some employers to offer members of generous defined benefit (DB) pensions cash to transfer out of the scheme. While the change in the rules is great for those in defined contribution (DC) pension there are very few instances where transferring out of a DB scheme is a good idea.
DB pensions pay a set amount of pension on retirement, based on number of years worked and salary level. As individuals live longer, the burden of these pension payment grow as the company has to continue funding retirements of former employees that could run for decades.
Hargreaves Lansdown head of pension research Tom McPhail said since the pension changes were announced in the Budget, he had seen an increase in employees with DB pensions being offered cash sums – known as enhanced transfer values – to leave the pension.
While these sums are supposed to be calculated on how much the pension would be worth, he said many schemes were short-changing the employees.
He said some of the transfer amounts being offered were ‘insultingly low’, but were being made on the back of the interest around taking pension cash.
‘I have seen a couple of examples where it looks like schemes want to tidy up their books and are doing an enhanced transfer exercise to encourage people off the books,’ he said.
‘Some of them were offering transfer values that were insultingly low and I do now know how they can justify offering [those amounts].’
McPhail said employers were also trying to push workers into taking ‘trivial commutation lump sums’.
Under the trivial commutation rules retirees can take a pension worth £10,000 or less in cash. You can take three pensions of this level as cash meaning a total of £30,000 can be taken under the trivial commutation rule.
Before the Budget individual pots of £2,000 or total, cumulative pots of £18,000 or less could be taken as cash.
McPhail said employees were automatically being offered trivial commutation lump sums without other options being presented to them.
‘We have seen some papers [from employers] where they say here is the trivial commutation lump sum…they are making people feel like they have no option [but to take the cash],’ he said.
Instances of employers offering cash for pensions could rise in coming months, warned McPhail. This is because next April a rule change means anyone wanting to transfer out of a DB pension must first be given regulated advice.
‘From next April employers will be required to offer regulated advice to individuals… if I was a scheme administrator or actuary looking to balance the books I would be keen to get rid of [DB scheme members] now,’ said McPhail.
He added that there were very few instances where transferring out of a DB was beneficial. An individual would have to be in poor health and have no dependents in order to benefit from transferring into a personal pension, he said.
If your employer approaches you offering a cash swap for your pension, McPhail said you were well within your rights to request the company pays for financial advice. Advisers charge ‘the best part of £1,000’ for advising on DB pension transfers on average.
‘Get regulated advice and even challenge your employer about it and ask them to get you regulated advice to see if it is in your best interest to take the transfer,’ he said.
‘I do not see how you can transfer out of a final salary scheme without having it analysed by an expert first… it is only reasonable that if an employer initiates [the transfer] then they should pay for [the advice].’…