Millions of workers could be sitting on six-figure pension lump sums and not even realise it.
With ‘jobs for life’ increasingly a thing of the past, more people have various smaller pensions from several jobs.
And while a single pension today might be worth £5,000 annually, the transfer value of the pension could be worth 25 to 30 times that figure.
Joint research from mutual insurer Royal London and consultants Lane, Clark & Peacock shows there are five million workers with these deferred pensions that they cannot take now as they are still working.
But few know the lump sum value or even realise that there is an option to ‘cash in’ when they are eligible.
And, according to Steve Webb, director of policy at Royal London, many schemes want members to opt out as it cuts their liabilities in the long-term.
Lower interest rates mean it is costing schemes more to invest money to generate returns to cover their commitments for the future. And that means they are increasingly keen to see people cash out.
“It’s going to cost schemes more to pay you long-term, so they are willing to give you more now to get rid of you,” said Webb, a former government pensions minister, “Transfer values are close to their peak.”
But he cautioned: “The only caveat is that while these are eye-watering sums, the reason they are eye-watering is that they have to last you a quarter of a century.
“There is a risk that you see £150,000 and think ‘wow, I’m rich!’, and then you think ‘that’s £6,000 a year for 25 years, I couldn’t live on that…’ Hence the importance to take advice.”
It’s reckoned the average worker today will have 11 different jobs, building up a pension here, and a pension there.
“You work for a company for several years, then move on, then there’s a kind of radio silence from the pension scheme,” added Webb.
“The years go by, you have a drawer somewhere with your last pension statement, but quite often you do not hear from them.”
He said that old statement might indicate that it’s worth £100 a week, but the reality is it’s now not worth more as it has to keep pace with inflation.
However, the more interesting aspect, he said, is that often the statement will not tell you what that is worth as a lump sum. Two in three schemes do not routinely advise what the transfer value is.
“If you were to transfer out, because you would be getting that pension for, say, 25 to 30 years, it’s not uncommon for a scheme to offer you 25 lots of the annual pension, if you are willing to give it up,” said Webb.
“Many schemes want people to opt out, they want to cut their liabilities. And 25 to 30 is not an extreme figure, some people are being offered 40 times.
“So, you multiply your annual pension by 25 or 30 and suddenly you’re up to a six-figure sum.”
About 80,000 people transferred out last year and industry experts believe it’s likely to be 50% higher this.
The joint research calls on pension schemes to be more proactive in offering members the full range of options open to them.