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22 May 2015

Is an exodus from final salary pensions more than just speculation?

New research by the Financial Times suggests that tens of thousands of people are considering leaving their ‘gold-plated’ final salary pensions for defined contribution schemes, in order to utilise freedoms available under new pension rules.

The rules, which give members of defined contribution schemes the liberty from age 55 to cash in their pension or take unrestricted withdrawals, were introduced in April this year but are not available to final salary scheme members. The changes also allow the defined contribution fund to be bequeathed to anyone, improving the prospects for children to inherit it tax-free on the death of the pension holder.

Broken record

Record-breaking numbers of individual members are asking their scheme administrator to provide an equivalent cash value for their final salary pension, arguably pointing towards a growing conviction among many that transferring could be worthwhile. Some administrators are reporting such transfer valuation requests running at more than double the levels seen before the March 2014 Budget – when the pension changes were first announced.

After asking for a transfer valuation, a final salary scheme member has three months to decide whether or not to proceed.

There is some suggestion that, rather than checking the value of a final salary pension with an intent to transfer it, media coverage of the new pension freedoms has simply spurred more people into asking for a valuation. The figures certainly bear that out; so far there is no evidence of a tsunami of money flowing out of such schemes.

Treasure from the past

Regarded as a precious relic from a different era, final salary schemes in the private sector have been in decline for decades as the costs to the employer have continued to increase. Instead, companies have looked to control costs by offering less generous defined contribution schemes to new employees. For those lucky enough to have one, a final salary pension can provide significant guaranteed benefits at retirement, whilst leaving the investment risk and decision-making with the employer.

“Time will tell if people actually transfer from their final salary scheme once they fully understand the benefits they would be giving up,” says Ian Price, divisional director at St. James’s Place.

“The cost of transferring could outweigh the benefits of freedom available under defined contribution schemes,” he observes.

Price stresses that people need to seek financial advice to establish the right course of action. Indeed, the rules state that individuals with a final salary transfer valuation of £30,000 or more must prove they have received advice before transferring.

“The pension reforms have increased people’s fear of making an irrecoverable mistake. A wrong decision about your final salary scheme would certainly fall into that category,” adds Price. “In some individual circumstances, for example those in poor health who could get greater access to their pension fund, transferring to a defined contribution scheme might be the right thing to do, but people should always seek help from their financial adviser first.”

The levels and bases of taxation and reliefs from taxation can change at any time.

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