20pc more if you swap your fi­nal salary pen­sion for a lump sum

The Daily Telegraph - Your Money - - YOUR MONEY -

Em­ploy­ers are of­fer­ing staff up to a fifth more than a year ago to swap their fi­nal salary pen­sion schemes for plans that give eas­ier ac­cess to cash, writes Sam Brod­beck.

Firms have been strug­gling with fund­ing short­falls for these gen­er­ous “de­fined ben­e­fit” schemes, which pay a guar­an­teed, in­fla­tion-linked in­come for life.

Fig­ures com­piled for Tele­graph Money by Old Mu­tual Wealth, a pen­sion provider, show that the value of deals of­fered to staff in re­turn for giv­ing up their rights to these schemes has jumped by be­tween 10pc and 20pc since the start of the year.

Trans­fer val­ues rise as in­ter­est rates fall, adding bil­lions to pen­sion schemes’ costs. Those es­pe­cially keen to re­duce risk will of­fer even more gen­er­ous deals to cut their fu­ture obli­ga­tions.

Typ­i­cally, a cash trans­fer value is cal­cu­lated by mul­ti­ply­ing a fi­nal salary an­nual in­come by 20 or 25. A fi­nal salary pen­sion of £30,000 a year would there­fore equate to a £750,000 lump sum.

This money will have to be trans­ferred to a “de­fined con­tri­bu­tion” pen­sion first. Fu­ture with­drawals will be sub­ject to in­come tax.

Pre­cise trans­fer val­ues will dif­fer be­tween em­ploy­ers.

Fears over the se­cu­rity of pen­sions pro­vided by the likes of BHS and the added flex­i­bil­ity of de­fined con­tri­bu­tion schemes have fu­elled trans­fers re­quests.

Fi­nal salary trans­fers are con­tro­ver­sial be­cause they in­volve giv­ing up a guar­an­tee.

The City reg­u­la­tor in­sists that peo­ple who want to trans­fer must con­sult a fi­nan­cial ad­viser if the trans­fer value is £30,000 or more. Such ad­vice can cost sev­eral thou­sand pounds.

Tele­graph Money has pre­vi­ously re­ported how savers have been blocked from trans­fer­ring be­cause pen­sion firms were un­will­ing to ac­cept the trans­ferred funds when the ad­viser had re­fused to rec­om­mend the move.

Jon Greer of Old Mu­tual Wealth warned that there was “no go­ing back” af­ter a trans­fer. “It can be a dis­as­trous choice if you sac­ri­fice se­cure in­come and leave your­self at risk in later life,” he said. “Get proper fi­nan­cial ad­vice and take your time to make an in­formed de­ci­sion.”

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