Thousands of people are transferring out of final salary pensions in order to get their hands on a potentially significant cash fund. Once the decision is made, however, it can’t be reversed, so it is crucial to make sure you get the right advice.
As much as £50 billion has been taken out of final salary pension schemes since April 2015. Over 80,000 people have transferred out of these defined benefit (DB) pensions in the last year alone according to The Pensions Regulator, swapping a guaranteed inflation-linked lifetime income in return for a cash lump sum.
Rising ‘transfer values’ are encouraging the trend. A transfer value is the amount of money you receive to put into another type of scheme if you leave your employer’s DB pension. These values have increased by up to a quarter in the last year because of falling government bond yields, and they can now be as much as 30 to 40 times the value of the annual pension being given up.
Should you stay or should you go?
Given the size of these transfer values, it is not hard to see why those aged 55 and over might be tempted to take this cash and either spend it or invest it in another type of pension arrangement. Many people may be hoping to pay off debts or leave surplus funds to their children, which is unlikely to be permitted with a DB pension.
You have to weigh this, however, against the security of receiving a guaranteed, inflation-linked income for life, which should also pay a widow (or widower’s) pension.
The danger for those who transfer out of a DB pension is that they could outlive their savings. The money could run out before they die if investment returns are poor, the funds are not managed effectively, or they spend too much or live longer than expected.
The importance of advice
It is vital to take advice before making any decision. In fact, it is mandatory to do so if the transfer value is more than £30,000. The regulator is now consulting on whether the way advice is given could be improved, to ensure people fully understand the long-term implications of transferring out of a DB pension.
Remember that once you’ve taken money out of a DB pension you don’t have the option to move it back at a later date. Pension transfers are not suitable for everyone.
Occupational pension schemes are regulated by The Pensions Regulator. The value of pensions and the income they produce can fall as well as rise. You may get back less than you invested.
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