The Government is facing calls to introduce a new requirement for people with guarantees embedded in their pensions to take advice before cashing out.
Under the proposal, first made by Royal London chief executive Philip Loney, savers with £30,000 or more in a pension with guaranteed annuity rates would have to speak to a financial adviser before opting for a lump sum instead.
The number of Royal London customers cashing out their pensions despite having generous guaranteed annuity rates has doubled since the Budget.
As part of the changes announced in March 2014 – when Chancellor George Osborne unveiled radical pension reforms – the trivial commutation limit rose to £30,000.
Since then, the proportion of people with small pots including guaranteed annuity rates – which can be as high as 14 per cent – who cash out has leapt from 26 per cent to 54 per cent, Royal London says.
Loney says: “We have seen a doubling in the number of people with small pots and guaranteed annuities who are taking cash. That’s not necessarily the wrong thing to do – they may have debt to pay, for instance – but if we start seeing that kind of thing for people with bigger pension pots I’d be really concerned.
“We should make it compulsory for anybody with a guaranteed annuity in a pot above £30,000 to take regulated financial advice before they draw out that annuity. Just like we’re doing with someone with a DB pot.”
He says Royal London policies with guaranteed annuity rates are commonly between 8 and 10 per cent, with the most generous at around 14 per cent.
Sovereign Independent Financial Advisers director Mark Hibbitt says the idea is “well intentioned and very sensible” but adds: “It is hard to say what the right threshold for advice should be because it would vary on a case-by-case basis.”
But Holland Hahn & Wills partner Simon Ainley thinks the advice requirement should be extended further, to any pension with a guarantee.
He says: “If there’s a guaranteed rate involved everyone should take advice, irrespective of the size of the pot. You could argue small pots could be of more importance to the individual. If someone is losing a guaranteed benefit, they should understand in straightforward terms what they are giving up and an adviser can help them do that.”
Under new rules, from April this year people will have to see an adviser before moving a DB pot bigger than £30,000 out of a scheme.
There is expected to be a surge in demand for transfers out of DB schemes to take advantage of the new flexibilities available in the DC market.
Old Mutual Wealth reports a threefold increase in enquiries about transferring out of DB schemes.
Retirement planning manager Adrian Walker says: “It has been suggested that DB to DC transfers may increase as savers look to take advantage of the new pension freedoms. We have seen transfer enquiries to our pensions technical team increase by approximately three times since the reforms were introduced.
“While it is too early to say if there will be a long term increase in the proportion of people transferring out DB arrangements, this does indicate that advisers with the right level of expertise are receiving more enquiries from consumers that want a comprehensive review of their retirement income options.”
A recent survey conducted by Hargreaves Lansdown pointed to around half a million DB scheme members planning to transfer out.