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Should I consider a transfer from my Final Salary Pension Scheme?

The recent fall in interest rates and gilt yields is boosting some pension transfer values.

The pension freedoms introduced last year allowed pension savers full access to their pots from the age of 55. Not everyone has access to these freedoms though. The exceptions are holders of final salary (defined benefit) schemes, which pay out an income for life rather than being a pot of savings. Many final salary scheme holders feel, rightly or wrongly, that they are missing out, and some are choosing to transfer their schemes into personal pensions to take advantage of their newfound flexibility.

Pension scheme deficits have been hitting the headlines again, and not just those of BHS. The Bank of England's efforts to bolster the post-referendum economy have been to blame. On one widely quoted measure - the Pension Protection Fund's PPF7800 Index - the overall deficit for private sector benefit schemes covered by the PPF was £408bn in July 2016, an increase of over £170bn in the space of just 12 months.

The reason is the fall in long term interest rates, which are the basis for valuing final salary pension scheme liabilities: as rates fall, the value put on the liabilities rises. Unfortunately for many schemes, the other side of the balance sheet - the investments assets - do not rise in value as rapidly, hence the deficit (liabilities - assets) widens.

The recent fall in interest rates and gilt yields is boosting some pension transfer values. There is one piece of potentially good news that stems from this situation: many schemes are increasing the transfer values they offer. This is due both to increases in asset values and to schemes' desire to reduce their liabilities by cutting membership.

In some cases, transfer values have been equal to over 30 times the prospective pension, meaning a £3,500 future pension could provide a six figure transfer value. There are many reasons to consider transferring a final salary pension. However, the starting point as pointed out by the Financial Conduct Authority, is the default position should be to remain in the scheme.

The reality however, is that for certain people there are many good reasons why it may be in their best interests to transfer for example:

  • if they are heavily in debt
  • if they have a short life expectancy
  • if they are unmarried and do not have dependents
  • if they would prefer wealth to an income stream
  • if they want to pass on the value of their pension to a spouse or children
  • if they would like the opportunity for a larger tax free lump sum at retirement
  • if they are concerned over the stability of an ex-employer
  • if they want personal investment control and flexibility

If you have final salary benefits from a previous employment, it could be worth seeing whether a transfer now makes sense, even if it did not a couple of years ago. To begin the process, please contact us.

Issued by AM&A Investment & Pension Planning Limited which is authorised and regulated by the Financial Conduct Authority. The contents of this blog do not constitute advice and should not be taken as a recommendation to purchase or invest in any of the products mentioned. Before taking any decisions, we suggest you seek advice from a professional financial adviser. All figures and data contained within this document were correct at the time of writing.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances. The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax or trust advice.