Could you be tempted into the next pension scandal?

Do you want a £500,000 lump sum? Think carefully, because it could be the biggest mistake of your life

Pension scandal looms

There has been a surge in people taking money out of final salary pensions - which is up 50% from this time last year. People are getting their hands on lump sums which are typically between £250,000 and £500,000. It seems like a cash bonanza for retirees, but if they're not careful it could be the next pensions scandal in the making.

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A study by Royal London found that most people transferring are in their 50s, and are being offered between 25 and 30 times the value of the annual pension they are giving up. Instead of taking the guaranteed income, therefore, they are calculating that they're not going to live more than about 30 years in retirement. It they make it any longer than this, they can invest the cash to cover the difference, and they'd rather have flexibility and freedom than security.

It's easy to see how people might be tempted. The study found that 83% of people welcomed the ability to take a more flexible income in retirement, while 78% were convinced by the large transfer values on offer at the moment. Some 69% liked the idea it would free up cash they could potentially leave as an inheritance, and 44% wanted to take benefits earlier than they could through their final salary scheme.

Mistake?

For some people, the benefits add up to a compelling reason to move, and the specific circumstances make it the best possible approach, but for others, it could be a horrible mistake.

The study spoke to advisers, and discovered the most common reasons they advised some clients against a transfer. Some 81% had advised against it because they were concerned about the individual losing the certain income from a DB scheme. This is guaranteed for life, and where an individual has every reason to expect a long and healthy retirement, this certainty is incredibly valuable.

We tend to vastly underestimate our life expectancy. Figures from Aegon show that men entering retirement today can expect to live to the age of 90 and women to the age of 92. If you were to live this long there's a risk a lump sum would run out - whereas a final salary pension is for life.

The second biggest concern was that people taking the cash may be tempted to take inappropriate investment risk (65%). This may mean people investing in property without fully understanding the risks they are taking, or persuaded by schemes with high potential returns - without appreciating the risks taken by the scheme.

The third most common reason (59%) was that the transfer represented poor value. This can be hard to believe when hundreds of thousands of pounds are on offer, but compared to a guaranteed pension for 40 years or more - the pension can easily offer better value.

Royal London director of policy Steve Webb highlighted that there was no single right or wrong answer when it come to transfers, because it depends on your circumstances, the scheme you are leaving, what you intend to move it into, and the transfer value you are offered. It's why it's key that people take advice before making what can be an incredibly complicated decision.

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