Don’t be tempted to transfer out of your final salary pension scheme

Switching out of final-salary schemes is very rarely a good idea, no matter how much money is on offer

The transfer values paid to savers switching out of their employers’ final-salary pension schemes have hit an all-time high, stoking fears that people may be encouraged to give up valuable guaranteed retirement benefits. Specialist consultant XPS Pensions Group says a 64-year-old entitled to a £10,000 annual pension for life could currently expect to receive £260,800 if they transferred their benefits to a defined-contribution scheme such as a personal pension plan. That represents an increase of more than 15% since March. The higher transfer values reflect changing actuarial assumptions, notably expectations of higher long-term inflation. 

But many savers may be tempted to make the wrong decision. In June, says XPS, the annualised equivalent of 1.05% of all members eligible for a transfer left their final-salary scheme – the highest figure since March 2019. The Financial Conduct Authority (FCA), the City regulator, has repeatedly said that for the vast majority of members of final-salary pension schemes, staying is a better option than taking a transfer. Moving to a different type of pension means giving up the guaranteed benefits that final-salary plans offer and exposing yourself to stockmarket risk. For some savers, there may be advantages in transferring, particularly where their final-salary pension is not likely to be their main source of retirement income. Other types of pension offer greater flexibility on withdrawals and can also offer inheritance-tax planning advantages.

However, even with a higher transfer value at the outset, it is likely that many members opting to transfer will end up receiving less pension income from alternative types of arrangement. They must also take responsibility for managing the money and may miss out on valuable dependents’ benefits.

Struggling employers unnerve savers

Regulators have warned that the pandemic could give rise to an increase in pension scams, with many people in dire financial straits owing to the virus. Members of final-salary pension schemes may also now be more likely to transfer out because they are concerned about the financial viability of employers standing behind their plans. But a generous compensation fund is available in these circumstances and the FCA insists this consideration should not be a factor in the decision about whether to transfer.

Some protections are in place, with anyone now considering transferring benefits worth more than £30,000 required to take independent financial advice before proceeding. Many schemes warn members about the perils of transferring. From October the FCA is also banning contingent advice on pension transfers, where advisers only charge a fee if their guidance is that savers would be better off going ahead with a transfer. The regulator is concerned that this model results in savers being wrongly advised to transfer.

The FCA now offers an online “advice checker” service for people concerned they may have received poor transfer advice, with the Financial Ombudsman Service ready to investigate cases of potential wrongdoing.

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