More savers cashing in final salary pensions
An increasing number of final salary pension scheme members want to cash in their plans, according to Old Mutual Wealth.
The wealth management company has reported that its investment platform has, in the year to date, received more transfers from defined benefit (DB) schemes than it did in all of 2015.
Old Mutual Wealth also says it has seen an increase in the cash value of defined benefit pension transfer offers, with a number of customers revisiting old requests and asking for a second cash equivalent transfer value (CETV) for their employer-backed scheme. According to Old Mutual’s Transfer Value Analysis Service the updated CETVs are typically between 10% and 20% higher.
This increased interest has been attributed to the pension freedoms, low gilt yields, and ongoing uncertainty over the future of some final salary pensions.
Jon Greer, pension expert at Old Mutual Wealth says: “Pension reforms introduced last year mean individuals can now take pension income from a defined contribution (DC) scheme as they wish, and the money can be passed on to their family in a tax-efficient manner when they die. It means that many people with a DB pension are considering whether DC gives them more flexibility. Equally, low gilt yields have contributed to a general increase in the transfer values available. With rates at record lows, many people view this as the optimal time to cash-out of their DB scheme.”
He adds: “Uncertainty is also contributing to the trend, with some people also questioning the security of their DB pension rights following some high profile cases that have come under the media spotlight.”
Transferring ‘isn’t a decision to take lightly’
But while transferring out of a final salary or other DB plan might look appealing at the current time, Old Mutual warns that is not a decision to take lightly because it involves giving up a guaranteed and inflation-linked income.
Plus, under current rules, anyone with a pension transfer value worth more than £30,000 must seek professional advice before any transfer can be approved.
Mr Greer says: “Nobody should enter into a DB transfer without being fully aware of the risks. It is vital to make a rounded assessment of the pros and cons in the context of your overall financial circumstances. A DB transfer can be the right thing for some, but it can be a disastrous choice if you sacrifice secure-income and leave yourself at risk in later-life. Get proper financial advice from a qualified professional and take your time to make an informed decision.”
The cash equivalent transfer values (CETV) is an assessment of the total accumulated cash value of a pension you will be able to take out of your existing pension and move into a new one should you change employers or decide you want to move to a more flexible scheme with greater benefits and lower administration costs. The transfer value will depend on the trustees of the pension fund assessing your contributions and investment growth to determine the transfer value, which may have to be certified by the scheme’s actuary.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Final salary pension
A defined benefit pension scheme is one where the payout is based on contributions made and the length of service of the employee. A typical scheme would offer to pay one-60th (0.0168%) of final salary (the one you’re earning when you finally retire) for each year of contributions to the scheme (even though these years were probably paid at a lower salary). Someone retiring on a final salary of £30,000 who had been a member of the scheme for 25 years would receive a pension of 42% of their final salary (£12,300 a year before tax). Sadly, many companies are winding up their final salary schemes or closing them altogether, meaning pension benefits accrued after a certain date (or those available to new employees) may be on a less generous money purchase basis.
Defined benefit pension
Often referred to as a “final salary” pension, benefits paid in retirement are known in advance and are “defined” when the employee joins the scheme. Benefits are based on the employee’s salary history and length of service rather than on investment returns. The risk is with the employer because, as long as the employee contributes a fixed percentage of salary every month, all costs of meeting the defined benefits are the responsibility of the employer. (See also Final Salary).