Pensions

MPs to probe growth in final salary pension cash-ins

MPs are to investigate a boom in the number of savers cashing in their so-called “gold-plated” final salary pensions as part of a wider inquiry into pension freedoms.

The Work and Pensions committee confirmed this week that it would examine transfer activity in final salary or defined benefit pensions, which has mushroomed in recent years.

The Financial Conduct Authority has said it remains in most people’s interests not to trade in a defined benefit pension — a vehicle which will pay them a secure, indexed retirement income — in exchange for a cash lump sum.

An estimated £50bn has flowed from company defined benefit schemes over the past two years as savers have been tempted by historically high transfer offers, often reaching six figures.

But the pension reforms, which gave over-55s more choice over how they access their retirement funds, are also said to be a key reason for many deciding to give up their defined benefit entitlements.

Once a defined benefit retirement fund has been transferred to a defined contribution pension arrangement, the investor is free to spend their fund as they wish, including spending it in one go, subject to tax.

The Work and Pensions select committee last week announced it would investigate whether changes were needed to the pension freedoms, amid concerns they had made some savers more vulnerable to scams.

The committee is also to investigate whether those making the most of the reforms are taking advice and whether the government and regulators are taking adequate steps to prevent scams and mis-selling of pensions.

In July, the Financial Times revealed that the FCA was widening its probe into the fast-growing market for pension transfers, amid concerns over potentially unsuitable advice being given to savers cashing in final salary pensions.

In July, JLT Employee Benefits, which runs administration services for FTSE-listed pension schemes, said it was currently paying about £100m of transfer values every month, or £750,000 per working hour.

JLT said the value of all defined benefit transfers for its clients in the second quarter of 2017 was more than 900 per cent greater than the value of all defined benefit transfers in the first quarter of 2014.

Transfer values have typically been offered at multiples of 30 to 40 times the projected annual pension income — and up to 50 times in some cases. For people on high salaries, that can mean sums of up to several million pounds.

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