Why Some People Are Cashing in Their Final Salary Pensions before They Retire
In the world of pensions, final salary schemes are often viewed as superior to defined contribution schemes because they tend to offer a more lucrative pension income. The final salary scheme promises a level of payment based on an employee’s income at the end of their career, or an average salary for their years of employment. Defined contribution pensions are based instead on the amount of money that has been put into the scheme – they’re easier for pension funds to manage because they only pay out on the basis of what the employee has saved.
In 2016, according to the Financial Times, hundreds of millions of pounds were paid out to members who wanted to take their money in a large lump sum. So why have some people been deciding to cash in their “gold-plated” final salary schemes before retirement?
The answer is that for some final salary scheme members – but not all – the value of that lump sum can be up to 50 times as high as their annual pension income after retirement.
Baroness Altmann was Pensions Minister under the previous Government, and told the FT she decided to cash in her two final salary pensions after transfer quotes doubled between 2014 and 2016, while several executives at an unnamed FTSE 100 company all made pension transfers.
Why are the offers so good for some people? The answer lies in government bonds. Final salary schemes are under pressure because low bond yields create a shortfall between the value of their assets and the liabilities of current and future pension members. The Pensions Regulator, meanwhile, has been applying further pressure to schemes to reduce this risk – which means buying more bonds.
Whether this continues is hard to know, but there are indications that bond yields are rising, after the US presidential election and better than expected economic news in the UK, which means that transfer offers may be lower this year.
The money is generally being invested in personal pensions or in offshore schemes in places like Gibraltar.
For many final salary scheme members, it can be hard to find out how much their fund is worth as not many schemes provide transfer value quotes on annual statements – they have needed to ask for this information instead. Transfer values are likely to drop further when schemes give this information as standard.
When advising a retail client who is, or is eligible to be a member of a defined benefits occupational pension scheme or any other scheme with safeguarded benefits whether to transfer, convert or opt-out, the starting point is to assume that a transfer, conversion or opt-out will not be suitable for that client. A firm should only then consider a transfer, conversion or opt-out to be suitable if it can clearly demonstrate, on contemporary evidence, that the transfer, conversion or opt-out is in the client’s best interests. Please also see the following link for the regulator:
This is a very complex area and most decisions of this nature are irrevocable so to discuss your pension arrangements with one of our financial planners, call us on 01992 500 261.
This article is for information only and must not be considered as financial advice. We always recommend that you seek independent financial advice before making any financial decisions.