Final Salary Pension Transfers – are they worth the risk?

The number of individuals transferring out of final salary (defined benefit) pension schemes has reached new highs as evidenced by the reported increase in transfer volumes. Willis Towers Watson – the prominent defined benefit pension administrator – for example reported that pension transfers out of their clients’ schemes had increased by a factor of 500% between April 2015 (when pension freedoms were introduced) and October 2016; versus the same period in 2014/15. Among the statistics is former Pensions Minister Baroness Ros Altmann who transferred two of her own final salary pensions as the funds represented a “very good-value offer.”

Essentially, transfer values have been driven up significantly by falling yields in UK government bonds which have been in decline for some time. Bonds are used as the benchmark for calculation of transfer values for defined benefit schemes. The outcome of the EU referendum resulting in ‘Brexit,’ has compounded the matter and further enhanced transfer values.

There are many reasons for the upsurge in transfers out of defined benefit schemes. Chief amongst them is the ushering in of new pension freedoms. This allows greater flexibility and control over when and how benefits may be taken from a defined contribution alternative and to a certain extent grants greater control over income tax in retirement. The death benefits payable post-transfer may also be preferable to the rigidity of a typical 50% spouse’s pension for a surviving spouse or civil partner. This is particularly pertinent when the scheme member has poor health and may not expect to see all of the benefit and security that defined benefit entitlement offers.

In some instances, the ongoing solvency of the employer sponsoring a defined benefit scheme can be an issue and high-profile cases such as Tata Steel and BHS have brought this into focus; especially those whose income entitlement is expected to exceed the threshold covered by the Pension Protection Fund.

Adding to complexity are the recent changes to thresholds at which the lifetime allowance (now £1m) and annual allowance (£10,000-£40,000, depending upon income) that make for some difficult calculation in relation to defined benefit entitlement. The decisions around transferring from the security of a defined benefit scheme require thorough analysis and contingent explanation of the risks ahead of execution. Generally, the best advice is to remain within the security for the security that defined benefit schemes generally afford members. However, the rationale for transfer can make a compelling case. In these instances, the need for advice is crucial.

For more information:

-> Defined Benefit/ Final Salary Transfers Advice

-> Pension Advice & Retirement Planning 

-> Pension Advice

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