Final Salary pension transfer values take off, as Schemes look to offload liabilities

Afinal salary pension has always been seen as the gold-plated route to a comfortable retirement. However, with transfer values hitting record highs, cashing them in has become more enticing. Nevertheless, savers who opt to transfer must be willing to forego entitlement to a guaranteed income stream from their company pension.

Over the last few years mounting discord in financial conditions and relative uncertainty in the markets has been reflected in poor gilt yields. In the face of this, pension schemes are looking for ways to offload their liabilities, offering members attractive cash sums for transferring out. Inevitably, this presents members of final salary schemes with some difficult choices. The lure of a large pot of money has to be weighed against the benefits that are being relinquished by leaving the scheme. A final salary pension offers a secure income in retirement. They are among the most generous and sought-after schemes around, so conventional wisdom says that swapping them for riskier defined contribution pensions is generally a bad idea. Yet sky-high transfer valuations have created a surge in interest from people wishing to do exactly that. Nearly all final salary schemes allow you to transfer what is known as the ‘cash equivalent transfer value’ (CETV), which represents the value in cash terms of your existing benefits. You can swap this for a defined contribution (DC) arrangement to get cash or income from the pension if you are 55 or over. Unlike a final salary pension, DC pensions offer no income certainty and the value of the pension pot is determined by the performance of the chosen investments.Yet many individuals find the flexibility of DC schemes attractive, as they can gain control of their investments, withdrawal of their capital as required; and they can pass on the residual fund to others, such as their children, when they die. If you do not need to insure against a long life, or your expectation is to have periods of very different income and capital requirements throughout your lifetime, or other assets you hold will provide enough income to you and you would want to leave your pension to your children when you die; then you might consider swapping a final salary pension for a DC pension. If you’re in good health and you want a guaranteed lifetime income with limited risk, or you want protection for your spouse or partner, then you should stay in the final salary scheme. To receive a complimentary guide covering inheritance tax planning, wealth management or retirement planning contact ChrisTweedWealth Management on 0131 303 0019 or email chris.tweed@sjpp.co.uk.