Fiscal View: Pension transfer to a private scheme is worth considering

PwC has calculated that savers who are about to retire are 30 per cent worse off than those who retired three years ago.

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On a recent Thursday night, I had almost no sleep at all as I ploughed my way through all seven episodes of Downton Abbey in one sitting. Why? You may well ask, but it seemed like a good idea at the time and, at least, I am now primed to take on the second series at a more leisurely pace. Anyway, you have to do these things if you want to stay current and be well-informed around the dinner table.

However, as a result of my marathon effort in front of the TV screen, I lacked the kind of focus that I needed to avoid a double-bogey on every hole. So I cancelled the golf and arranged, instead, to see my daughter for a stroll around the shops and the promise of an ice cream from Cold Stone Creamery. (If you haven't had one, you haven't lived.)

The main objective of the day was to purchase a pair of shorts for my granddaughter, Paige, in preparation for her epic school trip to Dibba. To the average man, a shopping expedition like this must sound like purgatory, especially as I had cancelled a game of golf to do it. But, in my unfocused, sleepless state of mind, it was perfect.

It was a lovely day and reminded me of what I have to look forward to when I retire. That is, if I can afford to retire.

According to research published recently, many people with private pensions will be as much as 30 per cent worse off compared with people with similar savings who finished work in 2008.

This situation has arisen because stock markets have fallen significantly over the past three years, thus reducing the value of an investor's pension fund. And, simultaneously, interest rates are currently at an all-time low, thus reducing the pension income that can be generated from the investments via an annuity or fixed-interest instruments.

This warning comes after the Bank of England resumed its quantitative easing programme by injecting £75 billion (Dh433.6bn) of new money into the economy. Sir Mervyn King, the bank's governor, must be very pleased with the market response to his latest round of money printing: the pound fell against the dollar; the FTSE 100 jumped and the UK's gilt yields fell. A weak sterling will help UK exports, higher share prices will help companies and lower gilt yields will help borrowers. All good for the economy, but none of this will help people who are about to retire.

PricewaterhouseCoopers (PwC), which conducted the research, has calculated that falling gilt yields have cut pension incomes sharply. Three years ago, every £100,000 a worker saved into a pension pot bought an annual income of £7,500. Three months ago, that figure was £6,500. And this week, the same sum would pay only £6,160 per annum. This corresponds to an 18 per cent reduction in income. Coupled with the recent fall in stock markets, PwC has calculated that savers who are about to retire are 30 per cent worse off than those who retired three years ago.

One option, of course, is to delay taking your pension until stock markets rise and interest rates improve, but this option may not be available to you. You may be obliged by your company employment rules to stop working at the normal retirement age, in which case, you will need to generate income from another source until it is cost-effective to start drawing down from your pension pot.

All of the above applies to people who have saved for a pension in a UK "defined-contribution" scheme or, as an expatriate, have simply acquired a pool of savings that they intend to use for generating a pension income.

The size of these savings will determine the income that can be generated. If, however, you are lucky enough to be a member of a UK "defined-benefit" scheme, then the poor performance of stock markets and falling annuity rates are, theoretically, of no significance to you.

It is your employer's responsibility to invest your, and its, contributions so that it can fulfil its end of the bargain and pay you the pension you have been promised. But it can only do this if markets perform and gilt yields do not drop, or if shareholders are willing to top up the capital pool.

Because shareholders are showing reduced enthusiasm for doing this, many of these defined benefit schemes are being closed down. If you are in this position, it is worth considering a pension transfer to a private UK pension or, if appropriate, to a Qualifying Regulated Overseas Pension Scheme, in which there are significant tax benefits.

Ironically, with interest rates so low, the pension transfer value could be much higher now than it was a few years ago. Now is a good time to consider such a move.

Bill Davey is a wealth manager at Mondial-Financial Partners in Dubai. Contact him at