Concerned Savers Flock To Exit Workplace Pensions

By Retirement
Workplace Pensions Underfunded By £2.37 Billion

Retirement savers are flocking to leave final salary workplace pensions with requests to transfer money out up by 75% in just over a year.

A survey by annuity provider Retirement Advantage found 40% of advisers had seen a significant rise in inquiries, while only one in four had seen no increase.

The survey follows separate reports of companies offering golden goodbyes to pay retirement savers to leave their pension schemes.

Advisers say changes in inheritance tax laws are also fuelling the flood of transfer requests.

Most money purchase or final salary schemes pay a 50% widow pension.

Golden goodbyes

Changes to inheritance tax rules allow direct contribution pensions, such as SIPPs or personal plans to pay 100% of unspent funds to spouses or loved ones.

Providing the retirement saver died before they reached 75 years old, no tax is due. If they die after reaching their 75th birthday, tax is paid at the recipient’s marginal rate.

Combined, the enhanced benefits are leading many retirement savers to switch out of workplace pensions as companies report they cannot afford to plug deficits of more than £700 billion.

Such fears are leading to uncertainty in the market as savers do not believe their pension providers can guarantee their retirement income as promised.

“Final salary transfers have long been seen as a taboo, but the subject has been thrown into much greater focus since the pension freedoms were introduced,” said Retirement Advantage pensions technical director Andrew Tully.

QROPS option

“Many schemes are currently offering transfer values higher than the historic average and, as a result, advisers have been able to match the benefits from the final salary arrangement using an annuity, leaving a residual fund available in drawdown.”

Expats can transfer out of a final salary scheme to a Qualifying Recognised Overseas Pension Scheme (QROPS) which offers a higher tax-free lump sum of 30% compared to 25% paid by an onshore provider.

The same IHT benefits also apply to a QROPS as a UK SIPP or personal pension.

“The ability for family to inherit the remaining pension fund free of inheritance tax is a strong driver for some, compared with the often poor level of death benefits available for someone who has left their final salary scheme,” said Tully.

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