More than 100,000 people cashed in their final salary schemes in the 2017/18 tax year, taking on average £200,000 at a time.
Some will have made the right decision, but others will have been misled by advisers, notably hundreds of British Steel pension scheme members who transferred out after being targeted by a financial advisory firm.
The number of transfers has fallen sharply since the scandal broke, but they can work for some.
However, if you are still tempted, you must consider all the pros and cons.
Final salary defined benefit workplace pension schemes are often described as “gold-plated” because they offer an index-linked income based on earnings and years of service, rather than stock market performance.
However, given that a final salary pension paying £20,000 a year can be converted into a whopping £700,000, you can see why people might be tempted to switch.
You can also see the temptation for advisers, who charge 2 per cent of the fund value, thus earning £14,000 on £700,000, a strong incentive to recommend transfers even when not the right thing to do.
You cannot transfer out after you have started to draw income from your scheme, but it is possible before then, with a little effort.
You should research exactly what you’re getting into before switching to a final salary pension
The danger is that by transferring out you are taking on all the investment risk yourself
April 2015’s pension freedom reforms, which allowed the over 55s to cash in their savings pots, were aimed at those with defined contribution money-purchase pensions rather than final salary schemes.
However, Andrew Tully, pensions technical director at Retirement Advantage, said they triggered an unexpected surge in final salary transfers as well: “The big danger is that by transferring out you are taking on all the investment risk yourself, and in most cases it will not be your in your best interest to do so.”
You may also open yourself up to scammers and fraudsters. Tully added: “They might encourage you to move for the wrong reasons or sell you unregulated investments.”
City watchdog the Financial Conduct Authority has suggested that all advice on transfers should start from the assumption that they will be unsuitable for most and insists people take advice when transferring £30,000 or more.
Tully said there are situations where final salary pension transfers can work, but tread very carefully: “Life-changing sums of money may be involved, making this one of the biggest financial decisions you will ever make.”
Patrick Connolly, certified financial planner at Chase de Vere, said transferring out can give you greater control over your money: “For example, you could transfer the money into a self-invested personal pension (SIPP), which lets you decide how and when to take your pension, and allows you to pass on any remaining funds to your family when you die.”
However, you are also gambling with your future standard of living.
“If you make bad investment decisions, withdraw too much, or live longer than you expected, there is a danger you will run out of money in your later years,” he said.
“The main purpose of a pension is to provide an income in retirement, and you should not treat it as a cash windfall.”
Transferring out can mean running out of money in your later years
Stephen Lowe, director at retirement specialist Just Group, said before transferring you must clearly understand the value of the benefits you are giving up, but in some cases it may be the right thing to do.
If in poor health with limited life expectancy, you may generate a higher income from an enhanced annuity.
He said: “Alternatively, a transfer could give you much greater flexibility to leave money to children and grandchildren.
Others may want the freedom to generate a big cash lump sum because they already have sufficient guaranteed income from other sources.”
Many defined benefit schemes do not recognise unmarried partners and may refuse to pay them a dependant’s pension, so single, widowed or divorced people will derive no benefit.
LEBC director of public policy Kay Ingram said that single people could also secure a higher pension by transferring: “The transfer value includes the cost of providing for a spouse or civil partner even though you have none, so you might get a higher single life income.”
She warned against advisers offering controversial “no transfer, no fee” charging structures, where the adviser earns nothing if a client decides against transferring out.
These “contingent” fees give the advisor a clear financial incentive to encourage people to ditch their plan. “It means there will always be a doubt about the impartiality of their advice,” she added.
Most people should consider themselves very lucky to have a final salary scheme and simply appreciate its benefits, which are too expensive for most companies to offer these days.
Those who do want to move on should proceed with extreme caution and remember any decision is final.
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