Should you transfer your defined-benefit pension scheme to a money purchase scheme?

Financial watchdogs have made it clear that they believe transferring money out of a defined-benefit pension scheme is a bad idea for most people. And yet people continue to defy this guidance.

People being showered with banknotes © Getty Images

You won't find that guaranteed income outside a final-salary scheme

Transfer values are on the rise, but leaving a defined-benefit pension scheme is risky

Financial watchdogs have made it clear that they believe transferring money out of a defined-benefit pension scheme is a bad idea for most people. And yet people continue to defy this guidance, often with the support of their independent financial adviser: 390,000 savers have transferred cash out of final-salary pension plans since the pension freedom reforms.

Now this number may be set to rise. Transfer values offered to savers considering a switch hit a record high at the end of August. A 55-year-old man expecting a £10,000 annual pension would have been offered an average transfer value of £247,000 a year ago. Today, the figure is £258,000, according to the XPS Pensions Group. The rise is down to a sharp fall in long-term gilt yields, which actuaries use to calculate the value of pension schemes' liabilities.

In practice, what you'll actually be offered depends on your scheme, with different final salary pension funds setting their own transfer values according to factors such as their current level of funding and the detail of their benefits. Somewhere between 15 and 30 times the value of the guaranteed pension is typical.

Still, transfer values may climb further in the coming months. Implementing a landmark legal ruling last year on sex discrimination by pension schemes related to equalising pension ages could prompt a further 5% rise.

Doing the sums

So are regulators right to insist that sticking with your final salary pension scheme is almost always the right move? Leave aside the issue of whether you believe your employer will remain solvent enough to meet its pension promises; if not, a transfer may be more appealing. The key question is whether you can generate more retirement income by investing your transfer value wisely than your final salary scheme is promising. The big lure of a final-salary pension scheme is that guaranteed income. You can't be sure that you'll do better with investments where returns aren't guaranteed.

It may be that you're attracted to a transfer for other reasons for example, you might want to cash in one pot of savings for a particular financial need, safe in the knowledge that you have other pension cash to fall back on. If you've thought this course of action through carefully, a transfer may make sense.

For most people, however, it looks risky, even with higher transfer values on offer. Financial regulators want people to err on the side of caution and to appreciate fully the guaranteed nature of final-salary benefits. That's why they insist that anyone moving a transfer value of more than £30,000 takes independent financial advice before proceeding.

Recommended

The minimum pension withdrawal age is set to rise – don’t get caught short
Pensions

The minimum pension withdrawal age is set to rise – don’t get caught short

From April 2028, the earliest age at which you can take money from your pension savings will rise to 57. It's vital that you understand the detail of …
13 Apr 2021
Four investment trusts for income investors to buy now
Investment trusts

Four investment trusts for income investors to buy now

Some high-yielding listed lending funds have come through the crisis with flying colours. David Stevenson picks four of the best.
12 Apr 2021
Private equity funds: get strong returns from these bargain investment trusts
Investment trusts

Private equity funds: get strong returns from these bargain investment trusts

Private-equity investment trusts are a way to buy into a high-performing sector that’s out of reach for most individual investors. Many of these funds…
2 Apr 2021
The downfall of Archegos
Investment strategy

The downfall of Archegos

A huge fund rattled markets last week as it forced a fire sale of assets. Should you fear the knock-on effects?
2 Apr 2021

Most Popular

The bitcoin bubble will burst: here’s how to play it
Bitcoin

The bitcoin bubble will burst: here’s how to play it

The cryptocurrency’s price has soared far beyond its fundamentals, says Matthew Partridge. Here, he looks at how to short bitcoin.
12 Apr 2021
Four investment trusts for income investors to buy now
Investment trusts

Four investment trusts for income investors to buy now

Some high-yielding listed lending funds have come through the crisis with flying colours. David Stevenson picks four of the best.
12 Apr 2021
Central banks are rushing to build digital currencies. What are they, and what do they mean for you?
Bitcoin

Central banks are rushing to build digital currencies. What are they, and what do they mean for you?

As bitcoin continues to soar in value, many of the world’s central banks are looking to emulate it by issuing their own digital currencies. But centra…
8 Apr 2021