The weekend press has a few articles about Pension Freedoms and converting final salary schemes into a cash lump sum to be invested. As financial advisers, this is not an area we advise on, (except for a long-term client at their Normal Retirement Age), but I can see the issues around this rumbling along for decades.
The Telegraph had an article expressing one man’s angst over a £1Million transfer and warnings from Tom McPhail of Hargreaves Lansdown that he believes that there is a lot of inappropriate advice being given. (See the original article here; http://www.telegraph.co.uk/pensions-retirement/financial-planning/right-swap-pension-1m/).
We have been approached more than once, by people wanting us to sign off a transfer from a final salary scheme to a cash lump sum, which we have refused at an early stage. All they wanted was their cash out so they could manage it themselves. This is an activity that would place us at severe regulatory risk for many reasons, not least, who are these strangers going to blame when they outlive their money?
People in general make the same mistakes in investments and pensions, they underestimate their life expectancy, over-estimate their ability to get returns from investments, tend to over-rely on a small asset group and over-react to newsworthy events.
What a final salary pension gives, more than anything else is security of income and protection from longevity risk, (living longer than expected). To abandon this for a sack of gold and not much else in an uncertain world, is a risk that very few should take.
At the moment, the FTSE 100 index is hovering around 7,300 and the inflation rate is around 2.3%; in my working memory, (since I graduated in 1984), the FTSE 100 has been well below 2000 and dropped below 4000 in 2003 and 2009. The inflation rate over the same period has been over 8%, (1992), and only briefly, negative.
Now imagine taking your £1Million from your final salary scheme, where someone else had to give you your income, no matter the circumstances, buying your investments with the FTSE at 7,300 and a correction occurs taking the FTSE down to 4000. Your £1Million is now worth only £548,000 and you still need your income, which will only reduce your pot even more.
Final salary schemes were described in the past as the “Rolls Royce of pensions”; nothing has changed, I will be clinging to mine to provide some “core” income in retirement. Along with so many things in life, just because you can do something does not mean you should!
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The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly, no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.