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

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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.