The majority of people might adopt a certain laissez-faire approach to their pension, perhaps checking on their nest egg annually, happy in the knowledge they will ultimately enjoy the fruits of their life’s career.
But the reality of the past year has forced many to address later life decisions prematurely, as barely a day passes without news of fresh redundancies.
The latest figures from the Office for National Statistics paint a grim picture of the labour market, with redundancies reaching a record level of 370,000 between August and October last year.
With hundreds of thousands facing financial turmoil, the resounding narrative from the professionals is clear — seek advice before embarking on any potentially life-changing decisions.
But what exactly might that advice look like?
Avoid the panic button
Tracy Crookes, a chartered financial planner at Quilter, urged those facing redundancy not to panic and avoid taking money from their pensions without understanding the implications.
The key message is to get advice and don’t react too quickly. Take time, there is help out there Tracy Crookes, QuilterMs Crookes said: “I met someone who had earlier this year accessed their pension pot completely, because they felt they needed the funds and then came to me to start making pension contributions again when circumstances changed.”
But the client had triggered the money purchase annual allowance, whereby future pension contributions were restricted to £4,000 a year.
Ms Crookes said: “They had no idea what that was or what it meant, but the decision they made earlier had that knock-on effect. The key message is to get advice and don’t react too quickly. Take time, there is help out there.”
Redundancy payouts
Additional decisions are thrown into the mix with the prospect of a partially tax-free cash redundancy payment, particularly against the backdrop of years of economic uncertainty.
Many in their 50s may have doubts about whether they will be re-employed after being made redundant and some may consider using a payout to make a dent in their mortgage.
I spoke with clients recently, and the question was: do I use this money to pay down my mortgage or invest? Neil Moles, ProgenyNeil Moles, chief executive of national advice firm Progeny, said the biggest deciding factor was whether the client had another job lined up.
He said: “The reality is everyone wants to retire without a mortgage. So paying down debt is a key cornerstone of financial planning.
“But I spoke with clients recently on this very thing, and the question was: do I use this money to pay down my mortgage or invest? And the consideration was: would you take out a loan to invest?”
And for those with enough of a cash buffer to offer security throughout unemployment, or who are fortunate enough to have secured another job, Ms Crookes suggests the possibility of paying some, or all, of a redundancy sum into a pension.
“Check with your employer to see if you can sacrifice some of your redundancy and have an employer’s contribution into the pension instead,” she said.
The nest egg
Another option that people made redundant are looking at is using their defined benefit, or final salary-style pension, as this can be a substantial asset. However, it is not always easy to access it.
The Financial Conduct Authority has repeatedly taken the stance that defined benefit transfers, or cashing in one’s “gold-plated” pension, are not actually suitable in the vast majority of cases.
It follows an avalanche of cases in recent years in which people were incorrectly advised to leave the schemes often favoured for their guaranteed income.
A transfer involves converting the benefits of a defined benefit scheme into a cash sum, known as the transfer value, and investing it into another pension.
Mr Moles said: “The whole world of defined benefit pensions is a difficult one, because in our experience there are very few instances where people benefit from actually transferring. It’s easy to look at a transfer value and be tempted by the cash value.
“But at a time when you are already going through significant change in being made redundant, it is dangerous to be making huge decisions about your future. Transfers cannot be undone.”
But the exodus of advisers from the defined benefit transfer market, following the FCA’s crackdown, has also triggered warning bells over a potential advice gap in the sector, either by consumers being priced out or a lack of supply.
And so what of those, albeit a minority, for whom a transfer would be most suitable when faced with the prospect of redundancy?
Nick Byrd, proprietor at independent financial advisers GN Byrd and Co, said: “The question advisers will be asking for clients is: do they stay put in the final salary scheme and let the benefits accrue under the scheme rules or do they look at the viability of a transfer out?
“We are in a bit of a perfect storm here, because at the moment with quantitative easing, gilt yields have been pushed way down, which means transfer values are more attractive than they were certainly two years ago.
“So it is worth those guys seeking advice on what they do with their existing defined benefit scheme.”
Many high-profile organisations are making redundancies, where those departing have been paying into a defined benefit pension.
Aston Martin, for example, announced last June it was laying off 500 people.
One engineer from the manufacturer was made redundant in October, aged 59, was doubtful of re-employment and had a £55,000 mortgage and car loan.
Mr Byrd, his adviser, said: “His full pension would be £6,777 [per year] with Aston Martin.” His maximum tax-free lump sum is £36,570 with a reduced pension of £5,485.
By going down the defined benefit transfer route he could obtain more.
Mr Byrd says: “The transfer offered was £313,500. A full pension on that, if he took 4 per cent drawdown income, would produce around £12,500 [per year].
“The tax-free cash under a personal pension is £78,375 — so that is an additional £41,805 than the Aston Martin pension.
“The residual fund after the tax-free cash is that it produces drawdown income of around £9,400, which again is around £3,915 more than the reduced pension with Aston Martin after tax-free cash is paid. So this guy would be able to pay his mortgage and car loan, and have a cash reserve of around £15,000.”
Mr Byrd concluded: “Everyone is different. The Aston Martin engineer clearly wanted the benefit as he felt unlikely to get another job.
“There are penalties if you take your pension early — so you must get advice.
“My advice is always get a comprehensive review of what is happening in your defined benefit scheme.”
Rachel Mortimer is a senior reporter at FT Adviser Twitter @R_A_Mortimer
