Pension regulators are chasing their own tails over the right of retirement savers to manage their own money.
The issue providers, savers, advisers and regulators are arguing about is transferring money out of a defined benefit pension to a defined contribution scheme.
Defined benefit pensions are typically offered as workplace pensions.
They come with a list of benefits, such as guaranteed lifelong payments that are index-linked, guaranteed annuity rates and spouse pensions.
The Financial Conduct Authority (FCA), the regulator of advice firms, has a default position that savers are likely to be worse off transferring out of a defined benefit scheme even if the employer running the pension offers a financial incentive to leave.
That’s because a defined contribution scheme comes with no guarantees and a pension payment based on the value of the fund – and that value can fluctuate.
But many retirement savers want to switch out of their workplace schemes because they do not offer pension freedoms – mainly the right to withdraw money from the pot as they see fit from the age of 55.
This polarised row has led to a see-saw of arguments.
On the one side the FCA is pressuring advisers not to recommend transfers out of direct benefit schemes.
On the other, savers want to move their money and manage the funds as they wish – just like the law says they can.
Pension freedoms are popular. Since April 2015, HM Revenue & Customs has reports savers have withdrawn £30 billion from their funds.
Pension transfer risks
The risks of leaving a direct benefit scheme are explained by the Money Advice Service, an impartial government agency.
“Any potential advantages of transferring from a defined benefit pension scheme to a defined contribution one are often outweighed by the costs, risks and loss of benefits involved,” says a spokesman.
“Your future pension income can’t be predicted with any certainty if you transfer to a defined contribution scheme, regardless of whether it’s run by your employer or it’s a personal or stakeholder pension.”
But the service also points out staying in a direct benefit scheme is not risk free.
“If your employer is still in business, it usually has to make sure the scheme has enough funds to provide the full entitlement to members,” added the spokesman.
“But some employers sponsoring these schemes have gone bust, not leaving enough money to pay the pensions promised.
“If an employer is going out of business without enough funds in its pension scheme, the Pension Protection Fund might be able provide compensation, but this might not be the full amount of the pension you’ve accumulated.”
Either way, there seems no right or wrong answer.