Be wary of cashing in your pension benefits
to historic lows increasing the cost of DB schemes meeting their liabilities, resulting in a developing argument that there might be advantages to getting those who want out off the books now, so to speak.
Xafinity, the actuarial, pensions and employee benefit consultancy, recently calculated that a 64-year-old with a DB pension worth £10,000 could expect to receive a cash sum of £223,000 if they transferred. That was the highest value in the two-year history of the Xafinity Transfer Value Index and, according to head of propositions Paul Darlow, maybe the highest of all time.
This is because transfer values are based on how much of today’s money it will cost the DB scheme to make good promises to members.
The figure, calculated on June 30, was £20,000 more than the value on January 1 and £25,000 higher than in March 2015.
And in addition to transfer values rising government pension reforms have made it more practical and attractive to switch as the money can be extricated and spent – not advisa- ble but good news for some, those in ill-health for example – and also passed down the generations.
So, individual circumstances may well justify a transfer.
However, those thinking of taking this route should not forget the guaranteed benefits they are giving up. Also, that the investment risk also then belongs to the individual.
Still, nearly one in three retirement savers would consider transferring their guaranteed final salary pension benefits into cash lumps sums or defined contribution schemes, reckoned a Metlife study of 1,141 over-40s in defined benefit schemes, with 31 per cent tempted by rising transfer values.
It found that one in two over-40s savers had some of their pension savings in final salary schemes, with around 11 million workers and pensioners still members of private company schemes.
Simon Massey, wealth management director at MetLife UK, cautioned: “The record high for final salary transfer values is tempting savers to give up the security of a guaran- teed income for non-guaranteed options, but there is a real risk that people will regret their decision.
“Guaranteed income is absolutely vital to ensure that people can have a comfortable standard of living in retirement and final salary schemes, along with other solutions such as guaranteed drawdown, provide that certainty. Anyone considering transferring out of a final salary scheme should take independent advice.”
And Mr Darlow added that, while switching might be good news for those seeking to access their money immediately, it should “absolutely not” be read as advice to transfer out of a DB scheme. I would endorse these warnings. The guaranteed benefits in DB schemes should not be thrown away lightly. There are scenarios in which it might be appropriate but the message must be – be very, very wary. Trevor Law is managing director of Merito Financial Services, chartered financial planners, based in Solihull. Email:tilaw@meritofs.com