Thousands of people are transferring out of final salary pensions in order to get their hands on a significant cash fund. Once the decision is made, however, it can’t be reversed, so it is crucial to make sure you obtain the correct advice before you take any action.
As much as £50 billion has been taken out of final salary pension schemes since April 2015. According to the Pensions Regulator, over 80,000 people have transferred out of these defined benefit (DB) pensions in the last year alone, swapping a guaranteed inflation-linked lifetime income in return for a cash lump sum.
Rising transfer values are encouraging the trend. A transfer value is the amount of money that can be transferred to a personal pension arrangement if you leave your employer’s DB pension. These values have increased significantly in the last two years, mainly because of falling bond yields and low interest and annuity rates.
Should you stay or should you go?
Given the size of these transfer values, it is understandable why those aged 55 and over might be tempted to take this cash and transfer to a personal pension arrangement, which will offer much more flexibility in terms of retirement income options and the provision of tax efficient death benefits. Many people may be hoping to repay mortgages or leave surplus funds to their children, an option which is unlikely to be available within a DB pension.
When compared to the fixed income a DB scheme will provide, this flexibility does seem very attractive. However, this needs to be balanced against the security of receiving a guaranteed, inflation-linked income for life, which will also pay a widow (or widower’s) pension.
The danger for those who transfer out of a DB pension is that they could outlive their savings. They will now have the responsibility of managing their pension fund themselves and should they suffer poor investment returns or make large unsustainable withdrawals from the pension fund, it is possible they will simply run out of money, especially now we are all living longer.
The importance of advice
It is vital to take advice before making any decision. In fact, it is mandatory to do so if the transfer value is more than £30,000. The regulator is now consulting on whether the way this advice is given could be improved, to ensure people fully understand the long-term implications of this decision.
Remember once you’ve taken money out of a DB pension, it is an irrevocable decision so there is no option to opt back in to the scheme at a later date. It is essential that you obtain appropriate holistic advice on your options. The starting point should always be that a transfer is not in your best interests. The pension review should then systematically consider all options before deciding on an outcome. No two cases will be the same and it very much depends on your personal objectives and wider retirement provisions.
This is a very specialist area of retirement advice and one which needs to be carried out by an appropriately qualified financial planner, specialising in retirement planning.