Final Salary Pension Transfers: An Update

By Alan Mellor, Managing Director and Chartered Financial Planner, Phillip Bates & Co Financial Services
You may recall that in the aftermath of the Brexit vote of 2016, the value of final salary pensions (otherwise known as Defined Benefit) rose dramatically.
In certain instances, clients were being offered cash sums equivalent to more than 30 times’ the projected annual income on retirement being offered to final salary schemes.
The sharp rise in transfer valuations was caused principally by the dramatic fall in AA-rated corporate bond yields which, in turn, track 15 to 20 year gilt yields.
While the amount of activity surrounding final salary schemes has undoubtedly calmed down, we continue to advise a number of clients asking the question: “Should I cash in?”
Our answer is always the same: What is the right thing for your long-term financial planning.
An example of this is one client who is in his late 50s. He has a number of final salary pensions and enquired as to whether it made sense for him to take the cash and allow him to retire earlier than he had anticipated.
We considered what was on offer from the various schemes and weighed this up against his financial plan, which we had developed a number of years ago.
The assessment told us that there was, indeed, an opportunity for him to take early retirement but that in order to do so, he only needed to ‘cash in’ one of his schemes. He was better off leaving his other final salary schemes untouched.
While the ‘offer’ to transfer out of final salary pension schemes may look attractive in terms of the headline number, you need to balance this against the longer-term value of remaining in your final salary scheme.
Employees who accept such deals give up a guaranteed income for life, and typically generous pay-outs to spouses should they die before them, in exchange for large sums paid into pensions without a guarantee which they must themselves make long term decisions about where to invest.
But they gain greater control and flexibility over their fund, the ability to pull all the cash from a pension after the age of 55, and much more flexibility over who is allowed to inherit their retirement pots.
If your appetite for risk is low, then it is rarely right to come out of a defined benefit scheme, even with large multiples of salary available there is still a significant element of risk in transferring. The current value of some sort of index-linked future income is easy to underestimate as is life expectancy.
Our experience tells us that, in the vast majority of cases, it does not make long-term financial sense to exit your final salary pension scheme. A guaranteed, inflation-proofed income for life is extremely valuable.
And what is right for one person is not necessarily right for someone else. Everyone’s financial requirements are different.
Anyone considering giving up a final salary pension scheme should talk to their family and also to an experienced financial adviser who is regulated as a Pension Transfer Specialist by the Financial Conduct Authority.