Surge in final salary transfers

Financial advisers are reporting a surge in the number of final salary scheme members who are trading in their pension plans for cash.

According to a survey of advisers carried out by Royal London, the volume of transfers out of final salary pension schemes – which pay a guaranteed income for life – has grown by over 50% in the last year.

Advisers claim that transfer values for those cashing in their plans are typically between £250,000 and £500,000. Royal London points out that this is greater than the average UK house price – currently £216,000       

Clients looking to do this are usually in their 50s and receiving transfer values worth 25-30 times the annual pension income they would get if they remained in the scheme. A quarter of advisers however reported transfer values worth 30 to 40 times the annual income they were giving up.

The most popular reason for cashing in the pension was the ability to take a more flexible income in retirement, followed closely by the fact that scheme trustees are currently offering such attractive transfer values.

Inheritance considerations were also a significant issue – while schemes continue paying income to spouses if you die first, they do not preserve any of your pension for other family members if you aren’t married (or in a civil partnership).

Other clients want to access their tax-free cash or start taking their pension income earlier than their current scheme allows.      

‘People need to think very carefully before transferring their pension’

However, while transfer values might be looking very tempting, Royal London’s director of policy, Steve Webb, says scheme members must not rush into a decision: “It is clear that large and growing numbers of people are choosing to exchange the promise of a regular pension in retirement for a large cash lump sum. For some people, the value of their pension pot will be greater than the value of their house.”  

However, he adds: “This makes it all the more important that people think very carefully before making a transfer, and take full account of independent financial advice before making such an irrevocable decision.”

Current rules mean that if your transfer value is worth more than £30,000 you must seek independent financial advice first. The survey found that the most popular reason for advising against a transfer was a concern surrounding the loss of guaranteed income, followed by worries that it was not appropriate for the client to increase their investment risk. The third reason was that the transfer value did not offer sufficient value.

Published: 19 June 2017
Last updated: 19 June 2017

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