Should you transfer out of a final salary pension scheme?
What is the current capital value of your final salary pension scheme from previous employment?
Retirement consultancy Mercer recently revealed that the final salary pension deficit of the 350 largest companies listed in the UK had reached £137 billion by the end of last year, despite the FTSE 100 index closing 2016 at a record high. That figure is more than three times the corresponding deficit amount of £39 billion at the end of 2015.
Against this, it is perhaps no surprise then that more and more people are seriously considering cashing in their final salary pensions from previous employment and transferring the funds to an alternative pension scheme. This is in stark contrast to past trends, where the security of a guaranteed income for life for you and your spouse, often linked to inflation, with all the investment risk taken care of by the former employer was generally seen as something not worth risking.
However, with a considerable question mark hanging over where the funds for many final salary pensions will come from in the future, suddenly the guarantee feels far from ironclad. As the title of a Telegraph article put it, “If a former pensions minister cashes in her final salary plans, perhaps you should too.”
Benefits of transferring
Transferring from a final salary to a defined contribution pension will give you a lump transfer value, which is usually twenty times the amount you would receive annually from your final salary pension, although due to ongoing low-interest rates and increasing longevity, these multiples have been rising significantly.
Whilst a defined contribution pension scheme (such as a personal pension) doesn’t offer the guaranteed income of the former, it does allow much more flexibility. Benefits include the ability to take multiple lump sums and the ability to pass on any unused savings after your death with the potential of no tax being due.
Another worry for some is that the economic turmoil of 2016 following the EU referendum and US election results could mean that the amount offered to transfer out of a final salary scheme may be about to drop sharply. There is also the recent debacle surrounding the collapse of BHS and the impact this has had on the pensions of its former employees, which have now fallen into the Pension Protection Fund with pension incomes for those who are yet to retire capped at 90% or even lower for higher earners.
Ultimately, there is real value in considering the position with any final salary pension schemes from previous employment and whether they remain suitable for your own circumstances and retirement plans. Whilst this is a major financial decision, our independent financial advisers within Carpenter Box Wealth Management have the skills and relevant qualifications to help. Indeed they have provided advice in this area to a large number of our clients detailing the options available in full.
If you have any questions about this topic, please get in touch with our Wealth Management team on 01903 534587.