Transferring from a Final Salary Pension – The Pension Freedoms Debate



Posted on: 6th December 2017

The Pensions Freedoms introduced by the UK Government in 2015 changed the pension landscape for good. Since then, pension transfer values have rocketed, meaning that, for the first time, people have willingly transferred their pensions pots away from defined benefit pensions to defined contribution pensions.

We look at how the debate has moved on in the last two years, and the current advice we are giving clients.

A Demand for Pensions Advice

To stay or not to stay, that is the question! For many people with final salary pensions (defined benefit pension schemes) this is now a burning question. Moving into a defined contribution pension scheme offers considerably more flexibility, but risks too. For many, the question of whether to stick or twist is a tricky one to make.

At Haven, we have seen a phenomenal surge in demand for advice around this often contentious issue. This shows no sign of abating, as more and more people in final salary  pension schemes look to explore their options and take advantage of the same freedoms that are offered to their defined contribution peers. Freedoms such as the flexibility to switch income on or off, increase or decrease it as personal circumstances dictate, as well as enhanced death benefits, tax efficiency and greater control all provide great appeal.

Perhaps the most tantalising prospect for defined benefit scheme members is the massively elevated transfer values that are currently on offer.

High Transfer Values

Why are values so high at the moment? Three important factors have combined to create almost perfect conditions for those looking to transfer.

1. People are Living Longer

The result of increased lifespans is that pensions have to be paid out for longer, something scheme managers are wary of.

2. Pension Schemes Under Pressure to Derisk

Defined benefit pension schemes have derisked – moving from a greater allocation to equities in favour of government bonds. This means that we are seeing lower returns on pension scheme assets.

3. Low Gilt Yields

On top of this increased allocation to government bonds, historically low gilt yields have meant that defined benefit final salary pensions schemes now cost much more to provide.

Different providers are offering different transfer values, but the typical offer for pension transfers has been somewhere in the range of 30–40 times the projected annual income of the defined benefit scheme. For those who are high earners, this equates to a significant and extremely tempting transfer value.

FCA Advice Remains on the Cautious Side

From day one of the pension reforms, the default position of the Financial Conduct Authority (FCA) has been that transferring away from a final salary pension is not advisable. It believes that clients are almost always best served by sticking with their ‘gold-plated’ defined benefit pension and the guaranteed income and inflation protection that it provides.

They have a point. For many, this is the most appropriate form of action. However, there are many people who are of higher net worth, and who may have other sources of income at their disposal who can afford to be more risk tolerant in their pension planning.

For many of the clients we deal with, transferring a pension to a defined contribution pension is absolutely the right decision for them, so that they can manage their tax affairs more efficiently, or leave a legacy to cascade down the generations.

Somewhere in the Middle?

There are also people who will sit somewhere in the middle. The comfort that the guaranteed income of their final salary pension scheme provides is important to them. But they could also  maybe benefit from investing a proportion of their accrued defined benefit pension into a defined contribution scheme.

Not all schemes allow this, but partial transfers are an increasingly attractive opportunity and can definitely benefit some people’s situations. This is an area where the debate on transfering has definitely moved on.

Partial pension transfers could well be a ‘best of both worlds’ option, for many people. Which means that the transfer or not argument becomes much less binary. The evolution of the partial pension transfer may be a real area of opportunity for people to achieve their desired financial outcomes, while also helping pension trustees and employers manage their liabilities.

Making the Most of the New Pension Landscape

There are certainly more options in pensions than ever before, but people’s retirement needs have not  changed. To retire comfortably people want sustainable income, access to rainy-day money, the ability to leave a legacy and flexibility and control over their retirement savings.

Retirement planning is now very much in the hands of the people. But there are still difficult long long-term choices to be made – all of which require robust and rigorous advice and high-quality investment solutions to match.

It’s our goal at Haven to always keep our clients’ interests at the forefront of everything we do. Whether it’s a full transfer, partial transfer, or whether we advise you to remain where you are, we always advocate the best solution that will benefit you. That way, we know that our clients will have the perfect retirement plan that will maintain them throughout their golden years.

If you have any questions about transferring from your existing defined benefit pension schemes, talk to us at Haven IFA today.