Caroline Legg: How can employers predict employees’ likely behaviour around pension flexibilities?

If asked this question the day after chancellor George Osborne’s Budget announcement last year, one might have predicted that most people with defined contribution (DC) pots will cash out their benefits to get access to them, if not to buy fancy cars.


As ever, over time, reality kicks in, and a number of factors make it difficult to predict how employees are likely to behave around the new pension flexibilities.

In the DC space, surveys indicate that a number of people will look to cash out their benefits for valid reasons, for example because they suffer from ill health or want to shape their benefits a different way to fit their circumstances.

But many people have not factored in the tax consequences, and that taking cash might push them into a higher income tax bracket.

Cash will inevitably appeal to some people, who want or need the cash, but a lot of people will go down the drawdown route to ensure they have something to live on into old age.

Logic suggests that members in defined benefit (DB) schemes will stay put. But, some will be in ill health and/or not favour the shape of benefits provided under the scheme, for example if they have no spouse or dependants and would not utilise any pension payable on their death, or they may wish to be able to pass on benefits to others in the family.

A further complication is that a DB member will need independent financial advice that they pay for, if they wish to transfer out, so this could further act as an impediment to the flexibilities.

In summary, it is impossible to predict on a member or scheme basis what employees will do with the new pension flexibilities.

Employers will need to wait and see, and make sure that they are able to deal with questions and contingencies from the schemes.      

Caroline Legg is a partner at pensions law firm Sackers