Most pension scheme members are unlikely to withdraw all of their pension rights as a lump sum

Gary Smith, 07 April 2015

Despite the new pension freedoms on accessing benefits at retirement, most pension scheme members are unlikely to withdraw all of their pension rights as a lump sum, according to research from Capita Employee Benefits.

A survey of 3,001 UK employees found that just 7.1% of members in DC schemes aged 55 and above say they will take their entire fund as a lump sum at retirement and 4.0% of DB scheme members aged 55 and above said they would look to transfer their entire DB pension to take advantage of the new freedoms in place.

The views of employees similarly reflected the views of Trustees and Pension Managers who believed that just 16.7% of scheme members would look to take all their benefits as cash. This followed research just published by Capita in its Pension Scheme Insight Report 2015.

Commenting on these findings, Gary Smith, Head of DC Consulting, said: “Our research suggests that the vast majority of pension scheme members will not be looking to take as cash their entire pension pots. In fact, just 6.6% of employees aged 55 and above say that they have altered their plans as a result of the new pension freedoms in place.

But we do have concerns about what the small minority of employees who take cash will do with their money. 34.0% of employees aged 55 and above say they will simply save the money. This may seem like a sensible act, but the reality is that they will face a triple threat. If they move this money to a bank account they will be subject to low interest rates. This money will also move from a no tax environment to be subject to tax at the highest marginal rate, for no reason at all. Money in pensions is also protected, especially when it comes to inheritance and bankruptcy.

Having the money sitting in a bank account may make it seem more tangible, but the reality is that if you are over the age of 55, you can take it out of your pension when you need it. We would suggest that employees should only consider taking all of the pension as cash if they have specific plans for that money.”

In addition, Mark Evans, Head of Corporate Consulting, said: “Whilst it is positive that it looks as if just a small proportion of DB scheme members will transfer all of their benefits out, Trustees will still need to be mindful of the potential increased threat of pension scams.

The Pensions Regulator has rightly highlighted this as an area of concern and it is important for Trustees to ensure they have proper protocols in place to deal with a possible attack. From our Pension Scheme Insight Report 2015, we found that just 62.5% of schemes confirmed they had a process in place. This is good news, but it may be difficult to be 100% confident that cases are being identified.

Our survey also suggests that 38.9% of those with salaries over £100,000 intend to transfer all of their DB benefits. This will be of interest to Trustees as these individuals can account for a disproportionately large share of the Scheme liabilities.”

Our latest Pension Scheme Insight Report 2016 is available here.

About the author

Gary Smith Head of DC Consulting

Gary Smith

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