Final salary pension schemes – it can make sense to transfer for a significant minority

18th September 2013


Our latest expert blogger to join the Mindful Money team Nick Flynn, director at LEBC The Retirement Adviser, alerts members of final salary schemes to the potential benefits of transferring out, though as always it depends on your circumstances and expert advice is essential.

Final Salary Pension Schemes have traditionally been perceived as providing generous benefits, and in most cases this is entirely true. However, there is a flip side that is often overlooked, and taking this into account may leave individuals with a decision to make – probably the only real choice you will ever have to make with such a scheme: should you stick with it and receive the pension, or should you take the transfer value offered?  The transfers option can be attractive for some.

The flip side of Final Salary Pension Schemes (or a Defined Benefit Scheme) is that you need to consider is that the benefits they offer are standardised, a ‘one size fits all’ solution that may or may not suit your circumstances. For example, schemes offer a spouse’s pension, no matter whether you need or want one. Similarly, you get no additional income for being in poor health.

What’s the alternative? Transfer values have varied greatly over time, but they are now higher than ever before as a result of increased longevity and low interest rates. Many people are staggered by the values, so the decision to transfer can be very tempting. A good time to make a decision is at retirement: members are offered guaranteed income figures that can easily be compared to annuity income figures or, for larger funds with Income Drawdown.

To make effective comparisons you need to obtain scheme retirement quotations and the transfer value statement. In addition, the tax-free cash is 25% of the transfer value, which is often 40–50% higher than the Scheme cash. Remember, it’s not all about the numbers; one of the key advantages of considering a transfer is to get a retirement income that is structured to suit you, not as the Scheme dictates.

In many cases the argument is compelling. It won’t be suitable for everyone, but if you’re single or have health issues it’s well worth investigating the options. Given that only 60% of retirees are married and over 65% of our clients get enhanced annuity rates, a significant proportion of retiring final salary members may have some careful thinking to do.

Needless to say, this is a huge decision requiring real care, and shouldn’t be attempted without specialist knowledge and advice. Make sure you consult a specialist adviser before taking any action especially if you are single or you (or your spouse) have health issues.

We have started advising many Scheme members on these options over the last 2 years and it is surprising how much of an advantage it can be.  However, it may only be only suitable for 20-30% of retiring members. Even so that’s a lot people that may be missing out on extra retirement options that can dramatically improve their pension income and tax-free cash.


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