Should you go or should you stay?

Gold-plated final salary scheme members are being tempted to swap their rights to an income for life for a generous cash lump sum.  Two years ago, the goverment introduced pension freedoms, but they only apply to members of defined contribution (DC) schemes and not old-style final salary schemes. To take advantage of the new freedoms, members need to transfer out of their old schemes and into personal pensions or sipps (self-invested personal pensions). 

Transfer values (which determine the amount on offer) from old employers running the schemes have been rising, prompting more and more people to consider cashing in. For example, a 64 year old man with a scheme due to pay out £10,000 a year at age 65 would have been offered £206,000 last year. Today that offer would be made at £235,000, according to Xafinity.

In a survey of 800 financial advisers, Royal London found that one in four had dealt with transfers worth 30 to 40 times the annual income. There’s every chance, however, that values have peaked — so if you’re thinking about cashing in your own final salary pension, now might be the time to weigh up the options.

Pros

Broadly speaking, by being in control of a cash lump sum you have access to a greater number of investment opportunities – and therefore greater potential for growth. Transferring can work well for those who have built up a few smaller pensions from having several jobs throughout their working life. Cashing in might also be the right move for a single person with health issues as they could receive less income over their lifetime through a final salary scheme than having access to a lump sum.

Also, someone in a very large scheme they fear may collapse might want to cash in while they can. There have been several cases where companies have failed their scheme members – among the most high profile was BHS.

There are also a number of tax benefits to being in control of the cash. You could spend down your estate to reduce your inheritance tax bill and leave the pension cash to heirs. You can also control your level of income to ensure you don’t slip into a higher rate tax band unnecessarily.

Cons

Cashing in a final salary pension means sacrificing a guaranteed income for life which gives you peace of mind that you will never run out of money. These schemes also offer a degree of inflation protection which means you don’t lose out to the increasing cost of living.  By moving to a personal pension scheme, the money is at the mercy of the stock market which means its value could fall and you might get a smaller income than if you had stuck with your original scheme.  You might also give up some valuable benefits. For example, final salary pensions must, by law, offer benefits to a surviving widow or widower if you die after reaching the scheme’s pension age.

Conclusion

There’s no right answer, so getting advice is vital. In fact, if your transfer value is worth over £30,000 you have to have an independent financial adviser to help you, under rules set by the Financial Conduct Authority (FCA). This advice must be provided by (or checked by) a specially qualified pensions transfer specialist. But even for sums below that, it could be worth considering paying an adviser to help crunch the numbers and analyse the scheme benefits as they’re all completely different. They will also look at your wider financial situation.

The FCA has recently published proposals to make the advice process even more robust to ensure the right people transfer out. It’s certainly an avenue worth exploring — but tread carefully as once you’ve cashed out, there’s no going back. It recently conducted a review of retirement outcomes and intends to develop additional measures to ensure people make informed decisions.

Article is accurate at date of writing.