Pension freedom is not working

As I pen these words, I am sitting outside a cute little restaurant in the beautiful mountain town of Fornalutx in sweltering Majorca. Thirty degrees centigrade and it is eight o’clock in the evening.

For once, the obligatory work suit is nowhere in sight. Instead, I am wearing a pair of Persil white jeans accompanied by a natty Lyle & Scott shirt and, in homage to Elvis, a pair of rather trendy blue suede shoes. Yes, life is good, extremely good thank you. It is a wonderful world, as Elvis once sang.

Look up from the table and I can see the forbidding limestone mountains that form the stunning Serra de Tramuntana range, peering down angrily at me.

They make me feel inconsequential, especially the formidable Puig Major, Majorca’s highest mountain. Maybe I am. A mere dry roasted peanut in a magnificent universe, much of which remains undiscovered. Is there life on Mars? Is there a god atop Puig Major? Is Elvis still alive? Will we ever know?

Naturally, I am indulging myself. After all, work has been tough as of late, with deadlines galore to meet and a pension freedom guide to write (destined to be a bestseller).

Also, it is the first time I have ventured outside Blighty on my own for many a year. The Lake District is normally as far as I go, although given the state of the M6 I could travel to and back from Majorca and have a hearty lunch at the Café de Fornalutx in the time it takes to get to Ambleside.

A mountain of steamed mussels sits in front of me screaming to be devoured. In the wine cooler stands a half bottle of Olarra Anares Reserva (Mel checking) white rioja. Crisp. Nectar. Good enough to turn a man to drink. It is already half empty. The waiter’s eyebrows twitch with disapproval.

No doubt he will be leaving me details of the local AA group before I head back to the delights of the Petit Hotel Fornalutx, a former convent, for a nightcap in the ‘honesty’ bar.

The good life, eh? Yes. But do not think for one moment I have come away to this Balearic idyl in order to escape the personal finance world that you and I make a fine living from. As Elvis would have sung if he had been interested in money rather than sex and drugs, pensions are always on my mind.

Thanks to hotel wi-fi and my bed companion – an uncomplaining iPad – I have been spending my late evenings reading through the second of the government’s recent consultation documents on pensions. It is called ‘Pension transfers and early exit charges’, and it is a riveting read. Not quite Paula Hawkins and The Girl on the Train (an ex-financial journalist is our Paula), but it is a document all financial advisers should devour.

The issue of excessive exit charges has been well documented – and championed by the likes of several national newspapers. So I will not say much on this subject other than that most pension providers are greedy so and so’s.

What I am more interested in is the issue of pension transfers, and in particular the right of people with safeguarded benefits (members of defined benefit schemes) to transfer their funds into defined contribution arrangements.

As the report spells out, transfers from DB to DC are fine and dandy provided they are effected through an independent financial adviser. The only exception is where a transfer value is less than £30,000, making advice prohibitively too expensive.

The process can be drawn out as members are told they must seek advice, the pension scheme then comes up with a transfer value and the member must prove they have received advice before the transfer is effected.

But some independent financial advisers now believe there are some sound reasons why transfers from DB to DC should be considered.

Some independent financial advisers now believe there are some sound reasons why transfers from DB to DC should be considered

For a start, transfer values have risen significantly in the past couple of years, making the maths in favour of a transfer more compelling.

Then there is the issue of greater flexibility. Under a DB arrangement, the pension pays out a guaranteed pension during the first life and then 50 per cent to a spouse or civil partner. It then, in most cases, dies with the spouse.

But if the pension is transferred into a DC plan, the owner, under the new freedom rules, can take control – preferably with ongoing advice of course. They can vary the income payments they take from the pension.

But most appealingly, the pension fund can cascade through the generations. And it can cascade without being taxed to the hilt – a result of the 55 per cent death tax being abolished. From the start of the new tax year, any beneficiary of a fund left by someone aged over 75 will be taxed on withdrawals at their highest marginal rate of tax.

Compelling? Yes say the experts. But such transfers are not happening.

Few advisers have the necessary qualifications or are willing to pay the hike in professional indemnity fees that such work would trigger.

Those that do are running scared that at some stage they will fall victim to a mis-selling claim. Pension freedom is not working.

If you feel passionately about this issue – whether for DB scheme transfers or against – you should respond to the consultation.

Adios, amigos.

Jeff Prestridge is personal finance editor of the Mail on Sunday