Fareham-based financial advisers Eight Wealth Management are offering clients guidance on whether transferring from a final salary scheme is right for them.
When the EU referendum’s outcome resulted in Brexit last year, the yield on a 10-year gilt in the UK fell below 1% for the first time ever, so pension scheme providers are looking to offload liabilities by offering members attractive cash sums for transferring out.
In 2016, final salary transfer values increased by 15%. A 64-year-old male with a final salary pension of £10,000 per year could expect an average transfer value of just over £234,000 as of December 2016 — that’s an increase of more than £30,000 compared to a year earlier.
Gilt yields have recovered somewhat, but the overall downward trend has made it more expensive for scheme providers to meet their obligations.
Eight Wealth Management’s Ian Price said: “Some schemes are offering transfer values of 30, 40, even 50 times their projected annual pension income, which can equate to several million pounds for some high earners.
“Inevitably, that presents members of final salary schemes with some difficult choices.
The lure of a large pot of money has to be weighed against the benefits that are being relinquished by leaving the scheme.
A final salary pension offers a secure index-linked income in retirement, with no investment risk — they’re among the most generous and sought-after schemes around, so conventional wisdom says that swapping them for riskier ‘defined contribution’ (DC) pensions would generally be a bad idea.
However, the skyrocketing transfer valuations have sparked a surge in interest from people wishing to do exactly that. Nearly all final salary schemes allow you to transfer what is known as the ‘cash equivalent transfer value’ (CETV), which represents the value in cash terms of your existing benefits.
You can swap this for a DC arrangement to get cash or income from the pension if you’re aged 55 or over, but unlike a final salary pension, DC pensions offer no income certainty, and the value of the pension pot is determined by the performance of the chosen investments.
But many people find the flexibility of DC schemes appealing, as they grant control of investments and the withdrawal of their capital, and they can pass on the residual fund to others — such as children — when they die.
Ian continued: “If you don’t need to insure against a long life, or you expect to have periods of very different income and capital requirements, or other assets will provide enough income and you want to leave your pension to your children, then you might consider swapping a final salary pension for a DC pension.
“But if you’re in good health and you want a guaranteed lifetime income with limited risk, or you want protection for your spouse or partner, then you should stay in the final salary scheme.
“Ultimately, if the final salary pension is likely to be your only source of income in retirement, there’s little point coming out of the scheme – especially if you’re trying to replicate the guaranteed benefits that are already provided in the scheme.
“You should always consult with your financial adviser to work out what the right course of action is for you.”
Now is an opportune time to talk to the financial advisers at Eight Wealth Management about historically low interest rates giving way to highly-inflated transfer values, which will reduce back to a more normal level when rates rise again.