‘The saver is being offered a sum nearly 40 times the pension’
rising. This is another side effect of low interest rates, which have pushed returns on safe assets, like government bonds, to record lows.
It is these assets that pension schemes must use to meet their future liabilities. The measly returns they pay mean liabilities have become even harder to fund, and schemes are prepared to pay in order to offload the burden.
Tom Kean, director of Thameside Financial Planning, said: “High transfer values are par for the course at the moment. We have a scheme currently going through where the saver is being offered a sum of nearly 40 times the pension.”
There is more to consider for those weighing up the decision to cash in a final salary scheme.
On transferring out, their money will be placed within a personal pension, and then typically invested into assets such as shares and bonds.
The aim is to achieve investment returns – from rising asset prices and income from dividends and interest – that match those from the final salary scheme.
This, of course, can never be certain and depends upon the returns from those assets. Until now it has seldom been worth the extra risk.
But the fact that transfer values are currently so high is helping to mitigate some of the dangers. Les Cameron, a tax specialist at Prudential, said: “Transferring out of a defined benefit scheme means taking on all the risk of investment losses, but that risk is much easier to take if the fund value is £1.3m instead of £800,000.”
A Prudential poll among advisers suggested that half had seen a rise in inquiries from clients looking to cash in their final salary scheme.
In Mr Major’s case, there would be further tax complications because his transferred pot would exceed the £1m lifetime allowance. None the less, both advisers he consulted said he could still reasonably expect to achieve a £43,000a-year income that both keeps pace with inflation and leaves his original capital sum intact.
The great extra benefit is that money held inside a pension is free from inheritance tax and can be bequeathed as the pension owner wishes. There is no tax at all to pay if the owner dies before age 75, and only income tax at the recipient’s marginal rate thereafter.
Mr Major, who lives with his wife in Penn, in Buckinghamshire, and has two grown-up sons, has set a retirement date for September, but has yet to decide how to arrange his pension.
He said: “If it was just me I think I’d just stay put in the ICI pension, but I’d like to pass on as much as I can to my family.”