“If I had a little money, it’s a rich man’s world,” Abba famously sang in the mid-70s.
Forty years on, and big changes to the pensions profession mean that for more and more people, they feel they have “won a fortune in a game, their lives will never be the same.”
A big focus for us at Carrick Financial Management is pensions, specifically defined benefit schemes at the moment.
These are the big final salary schemes where people worked for a host of local and national employers , big and small .
And the financial rewards for those who diligently demonstrated their loyalty to their employer and were members of their employers pension schemes over many years ,are truly eye-watering sums of money with the potential to transform the rest of their lives and their family’s.
Greater pension freedoms have seen more than 200,000 people in the UK transfer their pensions worth an estimated £50bn out of defined benefits schemes over the past two years, in favor of lump sums that can be left to their children with no inheritance tax due.
And the sums of money we are talking about for individuals are life-changing. As an example, it’s not uncommon for us to see a client at say 55 to be able to take a lump sum of £30,000 plus £4,000 a year from a big company final salary scheme.
Or he can transfer money out and it will be a £480,000 lump sum, for instance.
Now he can’t have all the £480,000 in one go (unless he wants to pay humongous amounts of tax) but the maths are that he can take 25% as tax free cash at 55, so that’s £120,000 now.
There’s shouldn’t be a problem for a professional financial adviser to easily match or better the annual income payment he receives if the client has the right appetite for risk, and the big advantage is that on his death the money will go to his wife and/or children and his children’s children.
The fact that you could retire and live for another 35 or 40 years but still pass on a decent amount of cash to the kids is a game changer for many people.
Bit of a no-brainer really.
What’s really interesting is that these are so-called ‘ordinary people.’ These are not entrepreneurs of high-tech companies, these are people who have worked hard all of their lives for big organisations who have access to literally life-changing amounts of money.
Pension pots valued at £500k, £1m and £2m are not uncommon.
For many people, their reaction when told their pension pots are worth six or seven figure sums is disbelief. “Is this real? Is this money really mine? Am I allowed to use it in this way?”
It’s a combination of them not being aware and not understanding the issues.
And what’s really important for people in this position when they get over the shock is to understand why this is happening.
The reason is these big schemes want a lot of people out. They want to take transfer risk off their books and put it on to the client.
Greater pension freedoms and tax changes introduced by the then Chancellor George Osborne in 2015, and the amount of risk institutional pension funds have to take with final salary schemes, means they are quite happy to push that risk out.
The fact of the matter is that you have no risk leaving your money where it is. But as soon as the money is transferred into your name, you are taking the risk.
It is our jobs as financial planners to understand these issues, manage them properly and extract the money in the most tax efficient manner for clients.
Legally, if you want to cash in your pension pot of more than £30,000, you must seek advice from a financial professional.
While this may be seen as an unnecessary expense by some, a survey by the International Longevity Centre and Royal London showed that people who receive professional financial advice are on average £40,000 better off than those who don’t.
So with sound financial advice on a pension transfer, “you wouldn’t have to work at all, you could fool around and have a ball.”