It has now been more than two years since the introduction of pension freedoms. And yet the spike in demand to cash in final salary or defined benefit (DB) pension schemes continues to gain momentum, with transfer values at record levels.
With four qualified in-house pension transfer specialists, Stockton-based Vintage Chartered Financial Planners has seen a surge in enquiries over the past 12 months, with people keen to explore their workplace pension options, safe in the knowledge that they will receive expert, bespoke advice, focused entirely on their best interests.
Final salary pensions are a type of workplace pension that offer workers a guaranteed income for life when they retire.
The income received in retirement is based on a percentage of the worker’s final salary multiplied by the number of years they have been in the scheme.
As well as typically being inflation-proof, most schemes of this type tend to offer a continuing spousal income – usually 50% – upon the death of the pension holder.
For a number of reasons, not least an increase in life expectancy, final salary schemes have become increasingly unaffordable for employers.
Therefore, in more recent years the vast majority of pension schemes offered to employees are defined contribution pensions, with future values linked to investment returns.
At the time of this article, many people are considering cashing in their final salary pension due to transfer values (the value offered to employees to transfer their pension away from the scheme) being at an all-time high.
Some schemes are offering transfer values as high as 40 times the annual pension (so £800,000 today in exchange for an inflation-linked pension of £20,000 a year for life), whereas transfer values historically would have been closer to 20 times.
Managing partner at Vintage, Sam Tate, explains: “Transfer values have risen dramatically because yields from bonds have fallen to record lows, leading to an increase in the cost to pension schemes of meeting their liabilities, therefore automatically increasing the transfer values available.”
Transferring your pension can bring with it many risks and for some investors it may still be best advice to stay within the scheme, despite the size of the transfer value on offer.
The FCA guidelines currently state that “The starting point for any advice should be that a transfer will not be suitable.”
Therefore, any decision to transfer should only be taken with the advice of a fully qualified pension transfer specialist and backed up with a detailed report which clearly demonstrates why the transfer is in the best interests of the client.
For those individuals whose best interests may be served by transferring, the task of then gaining control over the pension pot and making investment and income decisions each year is far from easy and requires investment knowledge, as well as financial planning expertise.
“There may be circumstances where it is sensible to transfer the pension – for example, in a case where the client is looking to take more control over their financial affairs,” Sam explains.
“It is imperative in all cases that any advice to transfer comes with an agreement that the adviser takes responsibility for reviewing the investments and client circumstances regularly. Given the risks involved, ongoing high-quality advice beyond the point of transfer is a must.
“As we approach our 30-year anniversary, we believe passionately in providing a professional service that must always result in the client’s best interests being served – whether the advice is to transfer or stay.”