Newspaper article Evening Chronicle (Newcastle, England)

Should You Cash in Your Pension Pot?

Newspaper article Evening Chronicle (Newcastle, England)

Should You Cash in Your Pension Pot?

Article excerpt

WORKERS being offered bumper amounts of money to cash in final-salary pension pots could spark a future financial disaster.

Savers are being lured in with lump sums worth up to 40 times the annual pension income they would receive if they remained in their defined-benefit pension.

With such enticing amounts it's no wonder so many people are tempted to cut and run.

The Pension Regulator estimates 80,000 people transferred out of final-salary pension schemes between April 2016 and March this year, and the numbers are expected to continue rising.

Being offered PS400,000, instead of a PS10,000-a-year income during retirement, is an impressive figure. But it comes with risks.

The PS10,000 annual income is guaranteed for life. But transferring the PS400,000 into a more flexible drawdown pension, so it can be taken as and when, offers no guarantees. And it could run out quicker than expected.

People considering cashing in a final-salary pension must get financial advice during the transfer if the value is PS30,000 or above. But there are no rules that demand savers take advice on what to do with the money once it is moved to a new scheme.

Since the pension freedoms were introduced in 2015, 30% of drawdown plans have been purchased by pension savers who took no financial advice. That's compared to a figure of just 5% before the changes.

Jonathan Watts-Lay, director of WEALTH at work, a provider of financial education, guidance and advice in the workplace, said: "It's alarming that such a staggering number of people have taken such a monumental decision without taking financial advice.

"The drawdown market is a minefield due to the huge difference between scheme structures and the fees they charge.

"Not only are there huge risks to pots from fees and funds not performing well in drawdown products, some people are taking money out of tax-efficient pensions to invest in taxable savings or in low-interest cash savings accounts. …

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