The cash equivalent transfer values – that is, the amount of money you receive, if you take a lump sum in lieu of your pension - offered by defined benefit (often referred to as final salary) pension schemes can appear very attractive, especially now you can draw on your pension funds as and when you want.
People are often staggered by how high the transfer value appears.
A potential client recently told me “I only worked for the company for a few years and can’t believe my transfer value is this much”. He was equally surprised by the income the scheme would pay him for the duration of his retirement, and that of his spouse.
Transfer values are so high because the cost of buying an income for life is high.
For example, if you are 67 and want to buy an income equal to the state pension of £8,546.20 per year that increases with RPI, it would cost in the region of £239,000, assuming you are in good health.
The first thing to consider is whether the transfer value represents fair value in respect of the secured benefits. Some number crunching can provide an indication of the rate of investment return needed in order to match the pension that would be paid by the scheme.
Even if the transfer looks like fair value, there are other things to think about.
Although moving the benefits can increase the ways you can draw on the pension fund (or not, if you wish to leave it as an inheritance), the basic question is - are you happy to see the level of your retirement pension fall or, in a worst case scenario, run out altogether?
It is important to consider how the pension fund fits with your overall needs and assets, because the transfer may not improve your pension income.
You also need to think about what might happen if pensions legislation were to change in the future, and whether sacrificing the security of a guaranteed income is a risk worth taking.
Striking a sensible balance between the options is not always an easy judgement to make.
Once a transfer has been made out of a defined benefit scheme, it cannot be reversed.
It is essential to realise that any transfer from a defined benefit scheme means a transfer of risk from the pension scheme to the individual.
You need to be sure you can cope with potential investment losses and resultant reductions in the income payable to you.
The Financial Conduct Authority (FCA) requires individuals to take specialist advice if a transfer value is over £30,000.
Despite the current high transfer values, the FCA views a transfer from a defined benefit scheme as “not a suitable transaction”, so advisers need to clearly demonstrate why moving to a personal pension is more advantageous.
Our team of experts have the knowledge and experience to guide you through difficult decisions and complex options. Please contact us, if you need assistance.
Crowe Financial Planning UK Ltd is authorised and regulated by the Financial Conduct Authority.