Workers should be able to 'slice and dice' their pension pots, says ex-minister

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Workers considering trading in valuable pension rights for cash should be given more opportunities to "slice and dice" their retirement pot, according to a former pensions minister.

Steve Webb, director of policy at Royal London, said people with defined benefit (DB) pensions, such as final salary schemes, should be given more opportunities to partially transfer their DB rights so some of their money could be taken as a regular income and some as a cash lump sum.

At present, transferring DB rights can be an all-or-nothing choice, he said, with workers not having the right to ask to transfer only part of their DB pension.

Mr Webb said giving more workers the chance to "slice and dice" company pension rights would allow people to still draw a guaranteed income from part of their DB pension while also receiving a cash sum, if they decided this was the right option.

Royal London, which has produced a new "good with your money guide" on the advantages and disadvantages of converting a salary-related pension into cash, said more than six million workers with DB pension rights could be affected.

DB pensions are often described as "gold plated" because they give people a certain guaranteed level of income when they retire. Many schemes have been closed in recent years as firms have found them expensive to run with people living for longer.

They have increasingly been replaced with defined contribution (DC) schemes, where the risk of how much pension someone will eventually end up with and how well investments perform is borne by the employee. 

Mr Webb said growing numbers of people are being offered large cash sums in exchange for giving up all of their rights in their DB pension scheme.

This could be seen as a reflection of low interest rates, costing DB schemes more to meet their pension promises, he said.

But he argued that allowing people to partially transfer their DB rights could be a "win-win" for schemes, which could see the levels of risk they face reduced, and for members, who would have a new option.

The pension freedoms introduced last year, which apply to DC schemes but not DBs, have also fuelled some interest in converting DB pension rights into cash lump sums, which can then be invested in DC pension arrangements.

Mr Webb said: "Regulations quite properly stress the many advantages of a final salary pension, and for many people leaving their pension rights untouched is the right thing to do. But for some, the option of transferring out some or all of their pension into cash is worth seriously considering.

"In particular, a new right for workers to 'slice and dice' their company pension, leaving some as a regular income and taking some as a cash lump sum, would offer new options.

"It is vital both that workers are aware of the value of the pension rights they have and also that they can get impartial and expert advice on whether a transfer might be right for them. We urgently need the rules and regulations in this area to be updated to the potential benefit of millions of workers."

Royal London's guide says the advantages of sticking with an existing DB pension could include there being no danger of running out of money, the pension being unaffected by the ups and downs of the stock market and there being some measure of protection against inflation, which maintains the "spending power" of the pension. 

One the other hand, transferring out could give someone more flexibility.

The guide also says that, because of the attractive features of DB pensions, the Financial Conduct Authority (FCA) tells financial advisers to start from the assumption that it is not in people's interests to exchange their DB pension rights for a cash alternative.

Royal London said it strongly supports existing requirements to take advice before giving up significant DB pension rights - and in producing the guide it is neither promoting DB to DC transfers nor seeking to discourage them.