Millions of British workers are sitting on a six-figure pension lump sum without realising it

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A lot of workers do not realise that they could be sitting on six-figure pension lump sums.

More people have various smaller pensions from different jobs with ‘jobs for life’ increasingly becoming a thing of the past.

Today, a single pension could be worth £5,000 annually, yet the transfer value of the pension could be worth up to 25 to 30 times the said figure.

Mutual insurer Royal London, and consultants Lane, Clark & Peacock’s joint research claims that there are five million workers that have these deferred pensions that they cannot make use of now as they are still employed.

But, there are few people who know the lump sum value or realise that there is a possibility that one can ‘cash in’ when they are eligible to do so.

Director of policy at Royal London, Steve Webb, discussed that many schemes desire for their members to opt out as it decreases their liabilities in the long-term.

Lower interest rates indicate that it costs schemes more to invest money to generate returns to satisfy their future commitments. And that suggests that they are increasingly keen to see employees cash out.

“It’s going to cost schemes more to pay you long-term, so they are willing to give you more now to get rid of you,” said a former government pensions minister, Webb.  “Transfer values are close to their peak.”

But he warned: “The only caveat is that while these are eye-watering sums, the reason they are eye-watering is that they have to last you a quarter of a century.

“There is a risk that you see £150,000 and think ‘wow, I’m rich!’, and then you think ‘that’s £6,000 a year for 25 years, I couldn’t live on that…’ Hence the importance to take advice.”

It is estimated that the average worker today will have 11 different jobs, establishing a pension here, and a pension from there.

“You work for a company for several years, then move on, then there’s a kind of radio silence from the pension scheme,” Webb added.

“The years go by, you have a drawer somewhere with your last pension statement, but quite often you do not hear from them.”

He discussed that an old statement might show that it is worth £100 per week, but the reality is it is now not worth more as it has to keep up with inflation.

The more interesting aspect, however,  he added, is that often the statement will not inform people what that is worth as a lump sum. Two out of three schemes do not routinely notify what the transfer value is.

“If you were to transfer out, because you would be getting that pension for, say, 25 to 30 years, it’s not uncommon for a scheme to offer you 25 lots of the annual pension if you are willing to give it up,” stated Webb.

“Many schemes want people to opt out; they want to cut their liabilities. And 25 to 30 is not an extreme figure, some people are being offered 40 times.”

“So, you multiply your annual pension by 25 or 30, and suddenly you’re up to a six-figure sum.”

Around 80,000 people opted out in 2016 and experts in the industry assume that it is likely to be 50% higher this year.

The joint research invites on pension schemes to be more proactive in giving members the full range of options open to them.