Recent market conditions have seen a massive rise in transfer values that could mean an upturn in the number of people wanting to move out of defined benefit (DB) schemes, something that may be considered strange given their reputation as the gold standard.
These once-common schemes promise to pay retirees an income related to their wage and the number of years of employment. They often come with generous perks such as inflation proofing or spouses’ benefits.
The Pension Freedoms legislation changes which, combined with the increase in values, has opened up the transfer option for these schemes. Under the new rules there are a number of benefits for clients when it comes to transferring out that go beyond rates of guaranteed income.
Many of these schemes are now in crisis, with inadequate funds to pay the promised pensions. This liability can be a crippling problem for the business, which has to prioritise its ailing pension fund ahead of other, vital investment in growth or future employees. This uncertainty undoubtedly poses a worry to our clients.
Some schemes are offering members “irresistible” deals to leave, as they struggle to fund their future liabilities. Cash equivalent values based on a multiple of projected income in retirement have in many cases soared from 20 times to 30 times.
An immediate consequence of the Brexit vote was that defined benefit schemes were sent further into the red. According to a leading pensions consultancy, the day after the vote the UK’s DB pension deficit rose from £820 billion to £900 billion.
Circumstances would need to be highly unusual for an existing employee member to give up future accrual for the sake of cash. However, for Scheme members with deferred benefits and no longer employed by the host employer such a huge cash windfall could be very tempting. One individual with a £1.4 million valued fund (who transferred) was able to take tax-free cash, buy a flat outright for his only daughter and leave almost £1million invested in funds of his choice.
High transfer values and the new pension freedoms mean individuals should at least explore the option to take control of their pension entitlements.
If you have a final salary pension and wish to understand options specific to you, a qualified adviser is required. We will take into account your full financial circumstances, your attitude to risk and your lifestyle to help you plan the right decisions for the retirement you want.