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Defined benefit pension transfer values 'shooting up' | Defined benefit pension transfer values 'shooting up' |
(about 13 hours later) | |
Six million people with defined benefit pensions have seen their transfer values shoot up in the last year, according to a major insurance company. | |
Under the rules of most defined benefit schemes, workers have the right to sell their pensions back to their employer. | Under the rules of most defined benefit schemes, workers have the right to sell their pensions back to their employer. |
According to the insurer Royal London, the cash that such people can get has soared over the last 12 months. | According to the insurer Royal London, the cash that such people can get has soared over the last 12 months. |
It says some are being offered "eye-watering" sums, often tens of thousands of pounds more than a year ago. | It says some are being offered "eye-watering" sums, often tens of thousands of pounds more than a year ago. |
For someone with a pension income worth £20,000, it is not uncommon to be offered 30 times that amount - in other words, £600,000 in cash. | For someone with a pension income worth £20,000, it is not uncommon to be offered 30 times that amount - in other words, £600,000 in cash. |
But while selling the rights to a defined benefit (DB) pension may be useful for many people, Royal London is also warning that there can be significant disadvantages. | But while selling the rights to a defined benefit (DB) pension may be useful for many people, Royal London is also warning that there can be significant disadvantages. |
'Pressure off' | |
After working for 30 years for a credit card company, Paul Osborne, from Southend, Essex, was made redundant. | |
He found it hard to get another job and found himself living on benefits. | |
As a result, he was advised to sell his DB pension. | As a result, he was advised to sell his DB pension. |
In 2014, he was offered a cash sum of £505,000 for it. A year later, that amount had jumped by 12%, to £567,000, an amount he accepted. | In 2014, he was offered a cash sum of £505,000 for it. A year later, that amount had jumped by 12%, to £567,000, an amount he accepted. |
He then reinvested the sum in a drawdown pension, which currently pays him £25,000 a year. | He then reinvested the sum in a drawdown pension, which currently pays him £25,000 a year. |
"It has taken so much pressure off my shoulders, and I am a lot more happy," he told the BBC. | "It has taken so much pressure off my shoulders, and I am a lot more happy," he told the BBC. |
"It has given me my life back; I can't recommend it enough." | "It has given me my life back; I can't recommend it enough." |
What is a defined benefit pension? | What is a defined benefit pension? |
Workers with defined benefit pensions know exactly how much they will receive in retirement. | |
Such schemes are either based on a worker's final salary, or on their career average earnings. | |
Workers with defined contribution (DC) schemes save into a pension pot, which they then use to buy a retirement income. The size of the pot depends on stock market performance. | Workers with defined contribution (DC) schemes save into a pension pot, which they then use to buy a retirement income. The size of the pot depends on stock market performance. |
The reason for the increase in transfer values is continuing low interest rates. | The reason for the increase in transfer values is continuing low interest rates. |
Pension schemes depend heavily on bond yields for their income, and with yields at record lows, many are struggling to meet their commitments to pay future pensions. | Pension schemes depend heavily on bond yields for their income, and with yields at record lows, many are struggling to meet their commitments to pay future pensions. |
So they have been offering larger and larger sums to people who are prepared to give up their pension rights. | So they have been offering larger and larger sums to people who are prepared to give up their pension rights. |
Royal London says selling DB pensions can offer: | Royal London says selling DB pensions can offer: |
'All or nothing' | |
But it also warns that keeping a DB pension is sensible for many people, as they offer: | But it also warns that keeping a DB pension is sensible for many people, as they offer: |
However, current rules mean that those selling their DB pensions have to sell the whole lot. | However, current rules mean that those selling their DB pensions have to sell the whole lot. |
Steve Webb, a former pensions minister who is now director of policy at Royal London, believes workers should be able to sell any proportion they wish - a new right to "slice and dice" their company pension. | |
He said the option of taking a large lump sum was "a bit all or nothing". | |
"You either take the whole lot out or leave it where it is," he told the BBC. | |
"What I'm saying is there should be a middle ground where you can go on having some of your salary-related pension, so you have got this guaranteed income, but then you have got some cash you can invest or do something more flexible with." |