Free your pension money – How to get the best sum from your final salary pension scheme

Final Salary Pension Transfer Values at All Time High

It’s never been a better time to look at transferring your final salary pension. The offers being made to people in the current climate are nothing more than generous. This has convinced thousands of savers to swap the guaranteed income for a lump sum cash payment.

But high transfer values aren’t the only reason savers are transferring out of final salary pension schemes. The flexibility offered from defined contribution pensions, over how you can use your money, is highly attractive. As is the ability to pass cash onto the next generation.

When should you make the pension transfer?

Having made the decision to transfer your pension, the next question to be answered is when is the best time to do it. Unfortunately, there isn’t a simple answer to this. Pension transfer value offers usually expire after 3 months, and there are plenty of questions to consider.

  • Should you transfer immediately, or wait to see what happens?
  • Will the transfer value of your pension increase, or will waiting mean that you lose out on a once in a lifetime opportunity?
  • Will your employer still be in existence in 20 years?
  • What kind of assumptions on investment returns are being made?
  • Will life expectancy continue to rise?

We’ve outlined 10 issues that could affect how much your pension fund offers you.

1. Rise in interest rates – lower transfer value

Transfer values are underpinned by yields on government bonds, or gilts. Simply put, the lower the return on investments, the higher the sum needed to pay your pension – leading to a higher transfer value.  A rise in yields can have a dramatic effect on pension transfer values. Hymans Robertson, estimate that for a hypothetical 50 year-old with an index-linked final salary pension could expect to have their offer cut by 25% on a 1% rise in yields. Gilt yields have remained at a record low since the financial crisis – one of the reasons for the current high transfer values. But hints that the Bank of England may raise interest rates have caused yields to rise. This rise will affect the value you may be offered in the future.

2. Stocks to Bonds shift – higher transfer value

The relationship of bonds and stocks has a major impact on returns. Pension funds are closing to new members, and have steadily shifted assets out of shares and into bonds. The result of this is an expected fall in returns. According to Hymans, a fund moving equal parts bonds and stocks to a majority bonds, could expect a reduction in returns of around half a percentage point a year, for example. This would increase our hypothetical 50 year-old’s transfer value by 16%.

3. Rise in cost of living – higher transfer value

Final salary pensions must rise in line with prices – this is the law. It’s a complex rule, it’s a simple rule, but if inflation rises, transfer values will also increase.

4. Older age – higher transfer value

As a general rule, transfer values rise as you get closer to retirement. This is because there is less time for the scheme to grow its assets to meet the promised payments.

Hymans hypothetical 50 year-old could expect a 9% increase in pension transfer value by waiting until 60years of age. People further from retirement will also find that the transfer value of their pension is more sensitive to fluctuations in interest rates, investment returns and inflation.

5. Longer life expectancy – higher transfer value

Final salary pensions are set up to continue to you an income until death. The longer your pension scheme expects you to live, the more it has to assume it will pay out.

Cures to major disease and continuing healthy living pushes the average life expectancy up on a regular basis. Hymans suggest that a rise of one year in life expectancy, would raise the average transfer value by roughly 3%.

6. Single not married  – higher transfer value

Most schemes provide a pension for a “dependant” that continues to be paid after the original member dies. Transfer values are based on the assumption that everyone in the scheme is married and take no account of the member’s actual status. For single people, transferring could represent better value than remaining in the pension scheme.

7. Lower retirement age – higher transfer value

Your scheme will have set out a “normal retirement age. As a general rule, the lower the retirement age of the scheme, the higher the transfer value. This is due to the longer time the scheme would expect to be paying out if you retire earlier.

8. Retail price index beats consumer price index – higher transfer value

Different pension schemes follow different rules. Some will increase in line with the consumer prices index (CPI) measure of inflation others with the retail prices index (RPI), normally around one percentage point higher.

In some cases schemes are allowed to switch index and many have done this in an attempt to cut costs. In the Hymans example, a saver’s pension linked to RPI would expect a transfer value 13% higher than if CPI was used.

9. Weak employer – lower transfer value

If the company behind your scheme is in financial is in financial difficulties or if the pension scheme has a large funding deficit, transfer values can be reduced.

10. The cost of advice – lower overall lump sum

Transfers values that of £30,000 or more are not permitted without proof that you have been seen a financial adviser. This does not directly affect the pension transfer value, but it does mean that the cost of advice must be added into to your equations, reducing the final amount you will receive.

Get the best advice from the experts

Knowing whether or not it’s the right time for you to make a final salary pension transfer is not straightforward. Which is why the best advice is to seek the advice of the experts. Not everyone’s situation is the same, and a final salary pension transfer may not be the right option for you. But talking to a fully qualified financial advisor will help you to make the right decision for you.

Contact us at Haven for more advice on Final Salary Pension Transfers and all the options at your disposal.