Retirement consultancy Mercer recently revealed that the final salary 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 (DC) pension will give you a large lump sum, which is typically used to be about twenty times the amount you would receive annually from your final salary (DB) pension. However lately, we are seeing transfer values of 30 to 35 times and some as high as 40 times. Whilst a DC pension doesn’t offer the guaranteed income of a DB scheme, 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.
All of which means that final salary pension schemes no longer feel like the rock solid retirement income they once were. 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 independent financial advice. This is a very complex area, that needs detailed research, analysis and comparisons, before any advice can be given.
If you have any questions around this topic, please feel free to get in touch with us directly.