Retirement consultancy Mercer recently revealed that the final salary, or Defined Benefit, pension deficit of the 350 largest companies listed in the UK had reached £137 billion by the end of last year, despite the FTSE 100 index closing 2016 at a record high. That figure is more than three times the corresponding deficit amount of £39 billion at the end of 2015. “This continues to put real pressure on any risk management plans”, says the UK defined benefit risk leader for Mercer, Alan Baker, “and will require trustees and corporate sponsors to work closely together”.
It’s perhaps no surprise then that more and more people are seriously considering cashing in their final salary pensions and transferring the funds to an alternative pension scheme. This is in stark contrast to past trends, where the security of a guaranteed income for life often linked to inflation was generally seen as something not worth risking.
However, with a considerable question mark hanging over where the funds for many final salary pensions will come from in the future, suddenly the guarantee feels far from ironclad. As the title of a recent Telegraph article put it, if former pensions minister Ros Altmann has opted to cash in in her final salary plans, perhaps you should too.
Transferring from a final salary to a defined contribution pension may currenly provide you with a lump sum investment equal to twenty times the amount you would receive annually from your final salary pension. Whilst the latter doesn’t offer the guaranteed income of the former, it does allow much more flexibility. Benefits include the ability to take multiple lump sums and the ability to pass on any unused savings after your death without the need to pay any inheritance tax.
Another worry for some is that the economic turmoil of 2016 following the EU referendum and US election results could mean that the amount offered to transfer out of a final salary scheme may be about to drop sharply. There is also the recent debacle surrounding the collapse of BHS and the impact this has had on the pensions of its former employees, which have now fallen into the Pension Protection Fund with incomes capped at 90% for those who have yet to retire.
However, if you’re considering transferring your final salary scheme to an alternative, as with any major financial decision, this should always only be done after seeking financial advice from an appropriately qualified pension transfer specialist.
Within Creative we have a wealth of experience in helping people review and potentially transfer their final salary pension. If you have a Final Salary pension scheme for your staff, whether current or historic, or if you or any of your employees have such arrangements from previous employers, we can provide all of the services you would need to help understand the options and values available to you, providing the valuable advice needed.
Details of our bulk proposition which is available to employers wanting to consider such topic in respect of a scheme they control can be found here and if you wish to discuss this at a bulk or individual level you should contact your normal Creative consultant, or email us on firstname.lastname@example.org in which case a consultant will make contact with you.
Please note that if you transfer your Defined Benefit pension scheme, you may not be able to replicate the benefits in the future, and that the value of a Defined Contribution pension plan can go down as well as up. You may not get back what you initially transferred, and transferring out of a Defined Benefit pension will expose you to investment risk.