Pension freedom is not working

Jeff Prestridge

Jeff Prestridge

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.

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.