The recent proliferation of missold pension has made many individuals wonder. Why are so many workers making the switch? What is it with personal pension schemes that have made them attractive to many workers. A recent news item revealed that as much 55 percent of workers have already made the switch from company sponsored pension to personal pension programs. This is a very big figure, so big that it can equal to approximately 20 billion in pension being missold. If you think about it, the figure can be disturbing.
Companies Are Cutting Pension Costs
At the heart of the missold pension issue are the companies who have lots of workers. Company sponsored programs like final salary schemes are excellent for employees but companies know that it will drain their financial reserves the moment many of the workers start collecting their pension. Most final salary pension schemes adjust the figure in relation to inflation and this makes the program all the more costly for the company. One way to cut cost fast, is to encourage workers to migrate to a personal pension program. In this way, the company gets to save a lot since they will not be the paying the workers in the future. It will now be the pension provider who will pay the pension.
Workers Do Not Fully Understand the Financial Advice
A critical component in pension migration is the correct financial advice. The financial advice must get to the heart of the issue and that is the suitability of the program to a specific individual. Not all workers may find personal pension scheme suitable for their present situation. Many can be better off with company sponsored programs. However, as what has happened many times over, the financial advice is usually built on assumptions printed on a computerized print out. The result usually comes in the following sequence: worst-case scenario is good for defined benefit or final salary schemes, but when it comes to best-case and mid-case scenarios the personal pension program wins.
Pension Companies Are Offering Deals
To make things more favourable to independent pension providers, many pension companies are offering workers who decide to make a switch. If you are wondering why the sudden increase in missold pension is happening, this can be the culprit. Some pension companies are reportedly offering 5,000 in cash to potential individuals who decide to make the transfer. Potential individuals are those who are contributing a substantial amount into their pension fund monthly. Even with the deal, pension companies still get to make a big profit from those who switch.
Workers Should Have Access to Free Independent Financial Advice
In order to minimize, if not prevent missold pension, regulators have instructed companies with workers to give them free independent financial advice. It must be advice given by people who do not stand to gain out of the transaction. While this may be laudable, very few give free financial advice. Most of those who give free advice are consumer advocates but they are in short supply. The result is that workers end up with financial advice that is given by people who stand to get monetary gain out of the transfer from company pension to personal pension programs.
Workers Fail to Calculate the Transfer Value
Without independent financial advice, workers will find it difficult to calculate the transfer value. How much do you get from the company scheme in comparison to the new scheme? If the new scheme does not provide that much in pension benefits, then you get a negative transfer value. Aside from that, you simple get missold pension due to the reason of unsuitability. This is one reason why regulators insist on independent financial advice, prior to the decision to change pension programs. Without such advice, the workers will always end up on the losing end.
Why are many workers making the switch? Two reasons stand out after such a lengthy discussion of details. First, companies want to save as much as they can, and as fast as they can. One sure way is to push workers to migrate to personal pension plans. Second, pension companies are offering cash deals for workers who transfer. If you thing 5,000 in cash is not enough, think again. If you were offered the amount, you may grab it at once and end up with missold pension.