Sunday 18 March 2018

'Buy Out Bonds' an attractive option as insolvent pension schemes wind down

More UK workers were automatically enrolled onto company pension scheme
More UK workers were automatically enrolled onto company pension scheme
Sarah McCabe

Sarah McCabe

A QUARTER of a million extra people will be forced into "portable pensions" by 2018 as hundreds of insolvent pension schemes wind down, new research forecasts.

Sales of portable pensions in the form of 'Buy Out Bonds' are rocketing as companies wind up failed defined benefit pension schemes, according to pensions experts Standard Life. Sales have grown by 50 per cent between 2007 and 2013. Overall new pensions business, by comparison, is down 44 per cent in the same period.

A pension Buy Out Bond is a vehicle into which you transfer money saved in a group pension scheme, commonly used when changing employer. It is essentially a portable pension pot that the individual owns and has complete control over. Rising sales of the product are generally perceived as a gloomy economic indicator, since they were traditionally associated with people who had recently lost their jobs. But a trend is now emerging, with demand coming from people who have kept their jobs but seen their company pension scheme wound up. Many defined benefit (DB) pensions, where employers guarantee a fixed sum for employees upon retirement regardless of the performance of their investments, are grossly underfunded – prompting people to opt out, or for the schemes to close outright.

"There are approximately 1,000 DB schemes in existence and we think it's realistic to expect around half, especially those that are deeply insolvent, to wind up over the next four to five years," said Jim Connolly, head of pensions at Standard Life.

A little known but attractive feature is the ability to access a Buy Out Bond at 50 years of age; most pensions have higher age limits governing access. However, it is a rarity for any pension to be accessed at 50 since they usually haven't generated sufficient savings.

Experts also warn caution in relation to the management fees charged.

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