Investor Points of Few – The Pensions Gamble…

When an employer commits to making a specific pension payment or a lump sum to you (or even a combination of the two) when you get to retirement age, they call that a Defined Benefit pension. Your employer comes up with the amount of that Defined Benefit (DB) based on a mathematical formula that includes things like your earning’s history, how long you worked there and your age.

By Alan Steel

“DB or not DB, that is the question
Whether it is nobler in the mind to suffer
The slings and arrows of outrageous fortune
Or to keep my pension rights where they are…”

(My apologies to Hamlet.)

Defined Benefit pensions?

Well, there are a lot of folks out there, driven by the opinions of celebrity commentators and other “experts” who think that it’s a good idea to take your accumulated pensions rights – those that are guaranteed by an employer backed Final Salary Pension Scheme – and transfer them out into your own plan and manage them yourself.

I don’t.

When you do that you’re gambling on that money performing better – with you looking after it – than the guaranteed return you would have in the Final Salary Scheme…and also that you’ll not live too long and subsequently run out of money.

Some folks are calling that option “freedom.”

It sure doesn’t sound like that to me.

Sadly, pensions holders are very confused about Defined Benefits because they really haven’t been clearly defined at all (no changes there, then).

In fact, even the FCA regulator is still trying to figure out what kind of guidance to give to folks about this, and it’s been two years since former Chancellor George Osborne allowed this lunacy to happen – he was trying to creatively raise taxes without folks complaining about how he was doing it, by opening the door to accessing Direct Benefits.

Thanks George.

Now, as with anything in life, love or money, there are the rare occasions when this route is actually suitable. From my firm’s perspective that happens about one in ten times (based on the enquiries we’ve had since this change came into place).

But you have to make the risks of doing so clear to folks…very clear.

Here’s a few problems you may not have thought about…

Ever wonder why you’re being told you’ve won the lottery by grabbing a transfer value that’s too good to be true, while at the same time your employer (or former employer) is rubbing his/her hands with glee that you took the bait?

You think you’ve won a watch, while your former employer is high-fiving everyone in the office.

Do you think they know something that you don’t?

Well, they reckon they’ve dumped an expensive liability onto you and saved themselves a fortune.

Oh and by the way…I take it that you know how long you and your partner are going to live, and what you’ll need for an increasing income guaranteed, come what may; which disappeared, of course, when you transferred into your own “control.”

Feel confident about your knowledge on longevity and investment issues do you?

Now ask yourself: If you had done this 10 years ago, removed 5% income from your personal plan for two years, discovered to your horror that the UK stock market fell 50% in the short term (as it did), and your “lottery win” had plummeted in value…how would you feel?

And what would you have done next?

Now…does all that sound like the type of place you’d want to land your retirement nest egg?

So don’t just listen to one side of an argument.

Take some good advice from folks who want to do the right thing for you…not them.

Because after all, it’s your money we’re talking about here.

Alan Steel, Chairman, Alan Steel Asset Management

 

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