Over recent months we have noticed a significant increase in the number of people contacting us to discuss transferring their benefits out of Final Salary Pension Schemes, to make use of the increased flexibility available to pensions from 2015.
Whilst many Final Salary schemes have in been ‘closed’ to at least some extent they generally still offer very valuable guaranteed benefits and as such should be treated with considerable care. It is in fact rarely considered to be in an individual’s best interest to transfer their benefit out of a Final Salary Pension Scheme due to the valuable guarantees these schemes provide. The Money Advice Service state in their guidance:
In most cases you are likely to be worse off if you transfer, even if your employer gives you an incentive to leave your scheme.
Final Salary schemes are held in a trust that is not part of the sponsoring employer’s assets, who have an open-ended liability all the time they are solvent and trading. In the event of the employer becoming insolvent and not being able to meet the assets would be earmarked in strict priority order. Not only is the Pension Fund not part of a company’s assets the Pension Protection Fund provides a valuable “parachute” for those who are unfortunate enough to require it.
For the reason that a transfer is unlikely to be in their interests and in the interests of fairness, before offering any professional financial advice we explain to those considering transferring their benefit out of a Final Salary Pension Scheme that we will charge an explicit, fixed fee, for any transfer analysis advice. This fee is due even if the advice is not to transfer, which is likely, for those individuals in normal health and otherwise “ordinary” situations.
The analysis we prepare for those considering a transfer of their benefit out of a Final Salary scheme principally centres around the level of annual investment return that an individual would need to achieve on their Final Salary cash equivalent transfer value in order to obtain an annuity at a fixed date in the future that matches the guaranteed benefits provided by a Final Salary Pension Scheme.
The required annual investment return figure is known as the “critical yield”. Most critical yields we see are at a level that is unrealistic to expect from any investment over the longer term, but particularly in the current low growth environment we are experiencing globally.
An often heard challenge from individuals to this is that an annuity may be the chosen option, or they may have other plans for the money. We must however compare like with like, and whilst an individual might not wish to buy an annuity, and may not value the protection of the Pension Scheme these are what we must refer back to when carrying out our transfer analysis.
The nature of this advice is highly personal but ultimately we refer back to the critical yield and as such usually find that it is rarely in an individual’s interest to transfer their benefits out of a Final Salary scheme. From time to time there can be additional considerations, for example, health being unusually good or bad, being single (providing less need for dependant’s pensions) and even factors like the lifetime allowance (the maximum pension that can be accumulated without tax penalties). This latter measure is generally assessed at a much higher level on a private pension than a final salary pension. On very rare occasions these additional considerations can lead to the conclusion that transferring their benefits out of such a scheme is in the individual’s best interests.
If you require personal advice on this matter we would be delighted to bear the cost of an initial conversation to understand your exact circumstances, explain how we work and highlight if there are any overwhelming “soft” factors that may make it more or less advisable to transfer out. Then, if you want us to undertake the full analysis we will charge a fixed fee, which we will discuss with you at the time, which will be dependent on the nature and complexity of the various benefits that you hold.