There are 11 million members of Final Salary pensions (we’ll use that term for simplicity) in the UK. These schemes provide a guaranteed income, which is usually protected against the ravages of inflation. Consequently, it was normal in years gone by, to leave them in place, indeed, in the vast majority of cases that is still the best thing to do as transferring to an alternative arrangement means losing the guaranteed, inflation-proofed, income.
However, the introduction of Pension Freedom, coupled with higher than normal transfer values, has led to an increase in the number of people considering the option of transferring their Final Salary pension.
New research, from the Prudential, has shone a light on why people are, and are not, considering a transfer of their Final Salary pension.
Reasons to transfer a Final Salary pension
1. Total control of pension funds 30%
2. High transfer value 24%
3. Want to manage their own investments 14%
4. Will be able to leave as an inheritance 13%
5. Will be able to pay off debts 10%
Reasons not to transfer a Final Salary pension
1. Do not want to make a mistake 29%
2. Do not want to lose guaranteed income 20%
3. Long and complicated process 18%
4. Worried about getting the right advice 17%
5. Unsure where to get advice 14%
It is perhaps unsurprising that the main reason given for transferring from a Final Salary pension scheme is the increased flexibility which will result. It’s also clear that higher than normal transfer value is also driving transfers. Although, with many experts now expecting transfer values to start to fall, this reason may become less important in months to come.
It’s clear that fear is a significant deterrent to people transferring their Final Salary pension. That may explain why only three per cent of the people Prudential questioned had actually transferred their Final Salary pension and only 20% were considering doing so.
Commenting on the research, Stan Russell, retirement expert at Prudential, said: “Interest in transferring final salary pensions has increased dramatically since 2014 for two reasons. Transfers values are currently high and the Pension Freedoms reforms also mean that a transferred final salary pension can now be more easily left as part of an inheritance.”
“However, it is reassuring to see that so many consumers are cautious about transfers. They are right to be wary of giving up a guaranteed income for life, and instead having to rely on the investment returns from their pension fund for income over a retirement that could last 20 or 30 years.”
Final Salary transfer advice
17% of people said they had not transferred their Final Salary pension as they were worried about getting the right advice. At the same time 14% of people said they didn’t know where to get advice.
This is interesting, as advice is actually mandatory for transfers over £30,000. But, we’d encourage everyone thinking of giving up a guaranteed, inflation linked income to seek advice. In the majority of cases it is in the member’s best interests to keep the Final Salary pension. Giving it up really isn’t something which should be done without a great deal of thought and, indeed, financial advice from someone suitable experienced and qualified.
We regularly advise clients with Final Salary pensions and are here to help.
If you would like to chat to Bev or Sarah please call us on 0115 933 8433.