Swapping final salary pension schemes for cash made headlines as transfer offers reached record highs in September and FTSE 100 executives and the ex-Pensions Minister joined the stampede. Those soaring values have now peaked, but many people, including our clients, are still finding cashing in all or part of a pension to be a very rewarding option, or even the answer to an emergency.
Take the case of our client who suddenly fell ill abroad. He had travel insurance and received all the necessary medical treatment. But now that he’s home, the insurers are trying to wriggle out of some of the costs. Our client could be liable for a large medical bill. The stress hasn’t helped his health.
Because our client had been deemed unfit for work on health grounds, he no longer receives a regular salary. A chat about his options revealed that he had an old final salary scheme with an employer whose financial future wasn’t entirely secure.
Having looked at all the other options, we advised him to transfer his pension out of that scheme, giving access to 25% of the fund value virtually straight away. He was able to bank sufficient money should the legal case with the insurance company be unsuccessful. The transfer also helped ensure financial security for family in the event of my client’s death because his full pension fund would be available tax free.
Transfer gold rush
Financial advisers across the UK report hundreds of millions of pounds paid in 2016 to members of final salary schemes. These savers have not yet retired, but opted to swap part or all of their future pension for a cash lump sum that is invested in a plan in their own name today.
Final salary, or defined benefit pensions, are considered ‘gold plated’ because they promise to pay a secure, index-linked income for life, based on final or career-average salary. For most savers, DB pensions deliver highly valuable benefits worth keeping, but anyone concerned about their former employer or needing access to funds now, to invest, spend, or improve cash flow, will be tempted to swap the pension for a cash transfer value while values remain elevated.
Transfers climbed to record highs after the Brexit result; typically offered at 30 to 40 times the projected annual pension income. The trend was driven by plunging yields on government bonds, which increase the cost to pension schemes of providing these regular pensions.
With gilt yields now edging up, reflecting strengthening US and UK economies, the big transfer values, which had jumped by as much as 25%, are now 8-10% below the September apex. Still high and likely to remain so.
The impact will vary depending on the size and health of different pension schemes, but the signs are that pension scheme liabilities will stay large. Therefore transfers will continue to be an attractive option for releasing cash funds just when they may be needed most.
Those taking a transfer must first put the cash in another pension product such as a self-invested personal pension (SIPP). New freedoms for personal pensions have made defined contribution pensions far more user-friendly.
So, while our clients who opt to transfer give up the security of a guaranteed, usually index-linked, income for life (provided their company scheme remains viable), they gain control over the investment and drawdown of their capital. Further, recent pension reforms allow any surplus to be passed on to family tax-free if the individual dies before age 75.
Martin Wolf advised in FT Money, “At current ultra-low interest rates, the transfer value of a defined benefit pension has become significantly overvalued. It seems sensible to take advantage.”
Making sense of the options
In a complex landscape, our role at Richmond Wealth is to help clients take advantage of the current opportunity. Together we weigh up the pros and cons, assess our client’s financial standing, ensure the swap goes smoothly and explore how best to use the funds. This is where our expertise and our independence are critical to provide objective, impartial, practical guidance in our client’s best interests. Which could mean remaining in an existing pension scheme or going for gold.
Recently the OECD warned that UK savers were at greater risk of running out of money in later life if they did not ensure a secure retirement income. As the next stage of life approaches, it is wise, as part of your financial planning, to review the pension options. Especially if your final salary scheme has a doubtful future or a transfer value too good to resist.
For more information or to book an appointment with Richmond Wealth, contact: 028 95 320 333 or firstname.lastname@example.org.