Final salary pensions – cash or keep?
ALWAYS TAKE ADVICE BEFORE MAKING BIG FINANCE DECISIONS, URGES TRICIA PHILLIPS
WORKERS are being offered bumper amounts of money to cash in final-salary pensions and give up the cast-iron guaranteed income.
A sum that’s up to 40 times the annual pension you would receive sticking with a finalsalary (defined-benefit) scheme can be very tempting.
And with a constant stream of big firms going bust, workers may feel safer taking the cash when they can.
For some, it may be right for them to transfer their cash to a more flexible option, such as people with serious health issues or savers with other money sources who don’t need the regular income for everyday living.
But for most savers it could be the wrong move. There’s a huge risk from fraudsters, for a start. They’ve already pinched £22.7million from pots since the pension freedoms began in 2015.
And savers could also end up in unsuitable newer pension schemes and run out of cash.
Latest industry numbers show that £34bn was transferred between pension contracts last year, with an average value of £250,000 for defined-benefit pensions.
It is estimated over six million pensions are eligible to transfer out from final-salary schemes – the gold standard for pension provision in the UK. Workers fortunate enough to have these schemes get a pension promise based on earnings and length of service with their employer.
Final salaries were common in workplaces many years ago, with companies such as Tesco, Royal Mail and BT offering them as part of the staff benefits package.
Over the past decade many have closed, or been closed to new members as employers struggled to grapple with costs. They’ve simply become too expensive for most employers to provide.
If you join a company today you will most likely be auto-enrolled into a defined-contribution pension, where you save every month and the amount you get in retirement is based on how the fund performed over its lifetime.
So why would so many people consider moving from the guarantee of an income for life to a pension where retirement income is dependent on how much you save and the performance of the stockmarket?
Andrew Tully, pensions technical director at Retirement Advantage, explains: “At first glance it would appear mad to move your pension from the safety of a defined-benefit scheme to one where you take all the risks.
“I’d say in most instances it won’t be in your best interest to move money out of a final-salary type scheme into a different type of pension. But there are situations where it can work – and that’s where proper regulated financial advice is key.
“The Financial Conduct Authority recognises this is a complex decision and insists most people speak to a pension transfer specialist.”
Life-changing sums of money can be involved, and an adviser can help you decide if a transfer is in your best interests. Steve Webb, former pensions minister and director of policy at insurer Royal London, says: “Whether or not to transfer out of a company pension is a very individual decision and depends on a wide range of factors. For some people, staying in a pension with guaranteed income that lasts as long as you live and pays out something for a widow or widower may well be the best option.
“But for others, the greater flexibility offered by a cash transfer, and the greater potential for children to inherit this money, might be attractive. The most important thing is to have an open mind when you talk to an expert adviser and listen carefully to the advice.”
The Pensions Regulator warns people to take care when deciding whether to transfer a pension pot out of a secure defined-benefit scheme.
A spokesman says: “It’s really important savers seek guidance or advice before making what could be a costly mistake or even worse, falling victim to a scam. In most cases, transferring out of a DB pension scheme into a different type of pension arrangement is unlikely to be in someone’s best interests.
“If you do decide it is in your interests to transfer, it’s important to understand the scheme you transfer to, including the fees taken by all parties as these can significantly affect the final value of your pension.”