Anyone that knows me will know that I have always been a fan of Siouxsie and the Banshees. I was listening to “Switch” in the car, on the way to work today , a song from their first album (and the first of their songs that I tried to learn on the guitar). It got me thinking about the new pension freedoms.
Moving from a final salary scheme to a SIPP/QROPS or another employer money purchase scheme is often referred to as a switch.
Pensions consultants, Towers Watson, recently conducted a survey about the public’s demand for switching away from final salary schemes and the results are starting to raise alarm bells.
According to Towers Watsons‘ research 9% of employees approaching retirement with defined benefit (final salary) pensions think they would be interested in exchanging most or all of this pension for a DC pot (own fund) that they can dip into as they wish. A further 11% would be interested in exchanging half of their final salary pension and 24% in exchanging less than half of it.
I wonder if those questioned know the risks that they could be taking and the results this could have upon retirement income.
Changes heralded
The popular press has heralded the changes as a victory for the public and well overdue.
Liberal Democrat pensions minister Steve Webb said: ‘This is great news for a huge number of people. It treats people like grown-ups and has been made possible by the state pension reforms the Coalition Government has bought in.’
There is no doubt that reform was overdue but is this a bridge too far? The reforms really shift responsibility onto the consumer to manage his/her pension pot during retirement. A retirement that could last 40 years.
Final salary schemes and annuities (although often unpopular and often misunderstood) gave certainty of income during retirement. A swtich throws away that uncertainty. We are all heading into unchartered territory and no one knows where this will all lead.
Certainty vs Freedom
Steve Webb recently addressed the Pension Schemes Bill committee and said: “We don’t know what models people will come up with. What we found out is that there are so many different permutations.We have set out our general approach and if something doesn’t seem appropriate we are reserving the right to say no“.
As Siouxsie sang “Watch the muscles twitch, for a brand new switch’’ followed by “ With patient guinea-pigs ….With drastic side-effects’’
I refer to my previous blog about throwing out the baby with the bath water. Unless correct advice is taken, some people will watch their pension income disappear down the plug hole.
http://christopherlean.weebly.com/blogs-from-bohemia/throwing-the-baby-out-with-the-bath-water
The Switch
And here is the song......
https://www.youtube.com/watch?v=WOH_VN5gAqE