Pensions 

Wrong retirement vehicle could cost seven years income

Wrong retirement vehicle could cost seven years income

Pension scheme members could run out of money seven years earlier if they choose the wrong retirement vehicle under pension freedoms, a report by XPS Pensions Group has warned.

The Member Outcomes under Freedom and Choice report found members with the average transfer value of £230,000 could run out of money up to seven years earlier than planned for if they draw an income of £10,000 a year or leave a lower inheritance than they planned for, at £500,000 rather than £840,000.

XPS Pensions scrutinised data relating to more than 6,000 pension transfers with a combined value of £1.4bn that had been processed since 2016.

It found 95 per cent moved from a defined benefit (DB) scheme to a self-invested personal pension (Sipp) or personal pension and that the charging structure of the receiving vehicle could have serious implications on the desired or expected outcomes.

Wayne Segers, principal at XPS Pensions Group, said: "Members deserve better guidance from the pensions industry. Advisers, employers, and trustees can do more to help them at this vulnerable time.

"It is hard to escape the fact that the last place where collective, cost effective support can be provided to people is whilst they are still members of their employer occupational pension scheme."

Mr Segers blamed the complexity of charging structures and pointed out that employees may end up paying for flexibility in investments that they don’t need and will never use.

He said: "With a continued surge in transfers from defined benefit schemes expected, it will be important for UK companies to help their employees and ensure they are supported in making good decisions with their pension savings."

The report said these issues could be addressed by ensuring members were aware of the consequences of transferring their pensions and offering support, identifying and informing members of low cost options and providing impartial regulated financial advice paid for by the scheme or employer.

Allowing partial transfer values was another possible outcome, which would avoid members needing to make one irreversible decision that affects all of their pension. 

Helen Howcroft, managing director of Equanimity IFA, said: "There is a substantial lack of knowledge among the public about transfer options. They tend to think transfers and drawing on their pensions as a no brainer, when in fact the consequences can be catastrophic.

"More certainly needs to be done to educate and inform people about their options."

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