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Home > Opinion > Tony Hazell

Out of date advice leaves pension savers out of pocket

Recently I was contacted by a reader who was wondering whether she should take the tax-free lump-sum from her final salary pension.

By Tony Hazell | Published Jul 04, 2012 | Pensions | comments

One of the great failings of the personal finance world has been to accept when a product or idea is past its sell-by date.

Take endowment mortgages. Changes to the tax regime, investment returns and economic climate turned a perfectly good product into a financial disaster area.

In January 2008 Standard Life admitted that 55 per cent of its mortgage endowments maturing that year would have a shortfall.

Yet later that same year two prominent IFAs were implying that any suggestion of shortfall was some sort of scam being pulled on consumers.

Let us look at unit trusts and open-ended investment companies. Nothing wrong with the product but it is taking regulator intervention through the retail distribution review to dismantle an old-fashioned charging method that should have been thrown out at least 10 years ago.

Out-dated arguments are also being used to justify high sales of investment bonds when they are really only suitable for a specialised niche.

Recently I was contacted by a reader who was wondering whether she should take the tax-free lump-sum from her final salary pension.

She had trawled the internet but all of the information seemed to be based on an out-of-date dynamic.

No one appeared to be considering the possibility of long-term low investment returns and inflation remaining above the Bank of England’s 2 per cent target.

For those in a final salary pension scheme offering a good index-linking, taking the lump-sum could prove to be a very bad decision, especially if they have a normal life expectancy and are a basic-rate taxpayer.

I recently talked through the issue with a number of people who have spent their working lives steeped in pensions.

Malcolm McLean, who now serves as a consultant to actuary Barnett Waddingham, told me: “Government ministers and regulators are rightly concerned about people being persuaded to transfer their savings out of company pensions but no one is making a fuss about the potential damage of people taking tax-free cash instead of leaving their pension intact.”

Robert Reid, of Syndaxi, said: “Most schemes do not offer anything like enough money to make it worthwhile to take the tax-free cash.”

Other IFAs concurred that this was now a much more complex issue. And it is one that desperately needs a greater airing and a wider debate because far too many employees simply take the cash without a second thought.

The government and private sector employers are desperate to persuade people to take tax-free cash so they can divest their liabilities.

This suggests employees should resist these offers. Good advice is important.

Making sure that advice is up to date and not past its sell-by date is vital.

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