Get the most from a final salary transfer
Many savers want to free pension money by quitting their scheme. Sam Brodbeck asks how they can get the highest possible sum
Incredibly generous offers made to people with “final salary” pensions have convinced thousands of savers that swapping the guaranteed income offered by these schemes for a cash lump sum is the right thing to do. Such sky-high “transfer values” are one reason that many savers are transferring out of the schemes. Flexibility over how you can use your money, including passing unused cash on to the next generation, is a further appeal of transfers to “defined contribution” pensions.
But making the decision to transfer is only the first step.
Deciding when exactly to take the plunge is tricky. Transfer offers typically expire after three months and some schemes will not issue more than one a year, even if you offer to pay. Dozens of readers have written to Telegraph Money to ask whether they should transfer immediately or wait until they are nearer retirement in the hope the transfer value will increase.
Pinpointing the best time to transfer is an art as much as a science. Will your former employer, which funds the final salary scheme, still exist in 20 years? What kind of assumptions on investment returns are being made? Will life expectancy continue to rise?
Below we set out 10 factors that could affect how much your pension fund offers you to quit the scheme.
Hymans Robertson, an actuarial firm, has modelled the impact of changes in these factors on a hypothetical saver: a 50 year-old with an index-linked final salary pension whose scheme has a typical investment strategy of holding half its assets in
As pension funds have closed to new members, they have steadily shifted assets out of shares and into bonds. As a result the expected returns are likely to have fallen.
If a fund moved from having equal parts bonds and stocks to a majority of bonds, that could dampen returns by around half a percentage point a year, for example. This would increase our 50 year-old’s transfer value by 16pc, Hymans estimated.
As a rule of thumb, transfer values rise as you near retirement. This is because there is less time for the scheme to grow its assets to meet the promised payments. If our 50 year-old waited until he was 60 to transfer, the lump sum would be around 9pc higher, all other things being equal, said Hymans. That would mean a transfer value of around £240,000 as opposed to £220,000.
People further from retirement will
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