I’ll say ‘No’ to the dough too on my pension

WOULD you go with the dough? No, I’m not talking about The Great British Bake Off’s Mel and Sue, pictured, choosing not to move from the BBC to Channel 4 despite the lure of serious money – but a trend for employers to offer tasty cash carrots to encourage members to leave generous defined benefit pension schemes.

There is increased activity in this area, says Richard Parkin, pensions expert at financial services group Fidelity, as employers attempt to rein in the ballooning future liabilities of these gold-plated pensions.

One way to chip away at these costs is for companies to end relationships with members, especially former employees who have left their accrued benefits in a fund until they retire.

There are several ploys used to settle such a divorce. The one that is soon to be dangled in front of me, for one, is the offer of a payout to leave. I have a small defined benefit pension with a former employer that has just launched a programme to offer members an ‘enhanced transfer value’ of their benefits. This means it will pay members a sum larger than their funds are worth right now, which I can transfer into a defined contribution pension instead.

I won’t know the nitty-gritty until next year, but the letter has prodded me to investigate the potential pitfalls of accepting.

The key factor for deciding ‘yes’, suggests Parkin, is whether I can replace the guaranteed income that I would otherwise receive.

We all need to have some form of predictable income in retirement to help cover basic expenses. The state pension will provide a foundation, but for the majority wanting more than a ‘baked bean and daytime television’ lifestyle, that is not enough.

Personal circumstances are an important factor. ‘If you are seriously ill or single, or both, it may be better to transfer the fund to a defined contribution scheme,’ Parkin says, ‘and then use the fund to buy an annuity. Those with shorter life expectancies are offered much better rates than the 4.5 per cent a healthy 65-

There is a trend for employers to offer cash carrots to get members to leave defined schemes

year-old might expect – without annual increases.’ Conversely, those who are married (like me) and expect to live to a ripe old age, are better off staying put.

Defined benefit schemes tend to provide an income for spouses left behind if you die – and other guarantees. These are expensive add-ons to replicate on your own.

When weighing up a deal like this, the rule of thumb is to take the annual retirement income you were expecting – in my case £1,000 – and multiply it by 22, or by 38 for an arrangement that includes annual increases for inflation. A sum of up to £38,000 can look attractive – but will it be enough to last the course?

Just one word of warning passed to me from pension adviser Wealth at Work: check that all the information sent to you in preparation for your decision is correct. The firm has encountered transfer value statements quoting out-of-date pension entitlements – ultimately flattering pay-out offers when accurate figures would otherwise make the transfer sum look less appealing.

Some people facing a choice of whether to stay or go rightly wonder whether their pension scheme will see rocky times (think Tata Steel and BHS). Parkin says it is ‘dangerous to extrapolate’ from these special cases.

And though pension deficits are soaring, he believes most employers are committed to closing the gap.

Jonathan Watts-Lay, director at Wealth at Work, also warns worried savers not to act in haste.

The safety-net Pension Protection Fund is an industry scheme that will pay up to 90 per cent of a pension’s value if an employer goes bust and the fund evaporates. But there is currently an annual cap of about £33,700 at age 65 – so for some this would mean getting much less than they expected.

When I finally receive my offer, I do not have to reach the decision alone. As part of such arrangements, it is my former employer’s duty to give me access to independent financial advice (at no cost). We are not talking big dough here (I only worked at the organisation for four years) but after considering the pitfalls of getting out, I suspect it will be a Mel and Sue ‘no’ from me. Still, I’m hoping my decision will mean I can have my cake and eat it.