Business

Pension transfers to be restricted by new rules

Savings jar
Image caption Some people saving for a pension may find their choices restricted

The government is proposing to stop people transferring their pension pots between final-salary schemes and defined contribution schemes.

The plan is contained in a recent consultation document from the Department for Work and Pensions (DWP).

That focuses on a separate topic - stopping defined contribution schemes from being contracted out of the state second pension.

But experts say the effect on pension transfers may disadvantage some people.

"It is a barrier for no apparent benefit," said Laith Khalaf of Hargreaves Lansdown.

"It looks like an infringement of people's ability to do what they want with their retirement money."

Risks

The vast majority of people who have built up entitlements in a final-salary pension scheme would have no need to consider transferring their pot into a defined contribution scheme.

They would be leaving the relative certainty and security of a scheme backed by an employer, with a clearly defined pension to come, for the much greater uncertainty of having their money invested in a personal pension fund which carried all the investment risk.

Mr Khalaf said most of the clients who approached his firm with this move in mind were advised not to do so as they could be giving up valuable benefits.

But there were still a small number of instances where someone might be better off.

These might be:

  • if someone was afraid their employer was about to go bust leaving the company pension scheme with a deficit
  • if someone was in poor health and could get a higher pension from an ill-heath annuity
  • if they were unmarried and could obtain a higher income from a single-life annuity
  • or if their death benefits might be higher from a personal pension.

The DWP consultation ends on 19 October 2010 and the new rule is scheduled to come into effect from 2012.

"We welcome representation from the pensions industry and will respond when the consultation ends," said a DWP spokesman.

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