What Pensions And Marshmallows Have In Common

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Financial regulators are trying to close the pension transfer barn door well after the horse has bolted into the distance.

A disgraceful feeding frenzy over the British Steel Pension Scheme has led to the Financial Conduct Authority to bring out new rules to curb the number of transfersfrom workplace pensions to private schemes.

Watchdogs, lawyers and unions are blaming unregulated ‘advisers’ for taking advantage of steel workers and placing their money into unsuitable investments.

About £1.1 billion has moved out of the British Steel fund because of this furore.

But the real blame lies with the government for piecemeal legislation that let the situation arise in the first place – and pension freedoms are at the root of the problem.

Pension freedoms are the real problem.

While workplace pensions offer better benefits but worse access to a fund than private schemes with better access and worse benefits, the temptation will always be to transfer out of the workplace scheme.

Financially, the move doesn’t make sense, but accessing 75% of your money at 55 years old rather than waiting for 100% when you are 60 or 65 is a no brainer for many retirement savers.

The same applies to rescued pensions taken on by The Pension Protection Fund (PPF).

The lifeboat offers 90% benefits with a cap on payments to workers who can take all their cash if they shift their fund to a private scheme.

The same happens with Qualifying Recognised Overseas Pension Scheme (QROPS) for expats. Only Malta offers flexible access on the same terms as pension freedoms in the UK, although the Isle of Man is likely to follow suit soon.

The lure of instant gratification

For expats approaching 55, the lure of drawing down the entire fund is a big temptation.

The civil servants drafting pension rules should have consulted the Stanford marshmallow experiment.

In this test, researchers offered the choice of a smaller reward instantly or a larger reward after waiting for 15 minutes. The test was tried on 600 children and only a third waited long enough for the second reward.

Defined benefit pensions may offer better financial rewards than direct contribution schemes, but it’s not human nature to wait when you can get instant gratification elsewhere.

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