Beware the workplace cash-for-pension swap
Employers are there to help us save for retirement, offering us workplace pensions and keeping us up-to-date on the rules. While this is the story for the majority of cases, the relaxation of the pension rules has been seen as some employers to offload expensive pensions at the expense of the saver.
Rumours have been making their way round the pensions industry about the bad practice of some employers that are still offering defined benefit (DB) pensions. DB pensions are expensive for employers because they pay out a multiple of a percentage of final salary and number of years worked to former employees. As these employees are living longer the burden of DB pensions weighs, even though these schemes very rarely take on new members.
In order to get rid of this burden, some employers have been offering DB members a cash lump sum as an alternative to their pension income. These are known as 'enhanced transfer values'.
Unfortunately the transfers values being offered to DB members have been abysmally low and do not reflect just how generous and beneficial DB pension income payments are. However, employers are offering these sums – which may seem generous in isolation and without the context of the pension's worth as retirement income – without providing advice and sometimes without even letting the employee know they have an option between taking the cash sum or the pension income.
While it is only a small section of employers who are using these underhand tricks to try and get rid of an expensive balance sheet burden, there are fears that this kind of tactic could increase in the run up to April. In April next year new rules means that everyone who wants to transfer out of a DB pension – which taking a transfer value effective is – will have to have regulated advice before doing so.
This regulated adviser will in most cases tell the pension member to hold tight and don't move out of the pension and don't take the cash, so employers who do want to get rid of these future burdens will probably start offering transfers out this year. This means employees have to be on the lookout and ensure they are guarding their interests at all time.
If you are approached by your employer offering you a cash for pension swap, don't take it. Get advice first because your DB pension is more precious than gold dust.
If you want to know more about workplace pensions:
Over 55s could face large exit fees
Are workplace pensions worth it?
OFT to investigate workplace pensions