Several factors, including the introduction of Pension Freedoms and an increase in the transfer values offered by some schemes, have combined to mean more people than ever are transferring their Final Salary pension to alternative arrangements.
In fact, late last year the Financial Times reported that over £50 billion had been transferred out of these types of pension, by over 200,000 people, since 2015 when Pension Freedoms were introduced.
So, are thousands of people making a mistake by transferring their Final Salary pension and if you have one, what should you do?
Before we go on though, it’s worth explaining that our thoughts in this article apply equally to Final Salary and Defined Benefit pensions. However, for the sake of simplicity we’ll continue referring to them as Final Salary pensions.
So, what have these people lost?
Those people who transfer their Final Salary pension to an alternative arrangement are giving up:
These benefits are so valuable that the Financial Conduct Authority (FCA) believe that for most people transferring their Final Salary pension will be unsuitable.
Commenting recently, Christopher Woolard, the FCA’s Executive Director of Strategy and Competition said: “Defined benefit (Final Salary) pensions are valuable so most people will be best advised to keep them. However, where people are considering a transfer, it is vital that they get good advice to enable them to make an informed decision.”
What are they gaining?
There’s little doubt that some people who have transferred their Final Salary pension will have gained very little. In fact, there are some well publicised cases where they have fallen victim to a financial scam and lost a significant amount of money.
That said, there are times, usually when someone is close to retirement, that transferring away from a Final Salary scheme might be the right thing to do.
However, whether a transfer is appropriate for you to do can only be confirmed following a thorough analysis of your circumstances, objectives, attitude to risk, and the scheme you are a member of.
The fact a Final Salary transfer is an irreversible decision; you can’t move the money back in to the scheme once it’s been taken out, adds even more pressure to the decision. Giving up a guaranteed, inflation proofed income, should only be done when you are absolutely sure it’s the right thing to do.
In fact, the government and regulator believe advice is so important that anyone who wants to transfer a Final Salary pension worth more than £30,000 must have taken regulated advice before the transfer is allowed to proceed.
Follow the herd?
So, should you follow the herd and join the hundreds of thousands of people who have transferred their Final Salary pension?
Sadly, in an age when many of us seek definitive answers that’s unfortunately not something we can answer here.
However, despite the short-term temptation of a large transfer value and the urgency created by a short window (three months) to accept the figure you’ve been offered, we can say with certainty that transferring your Final Salary pension just because others are doing so isn’t the right thing to do.
The requirement for advice has been put in place for a good reason; the decision to transfer is irreversible and the guaranteed benefits given up significant. Furthermore, with many transfer values now above the value of the average home (Source: Royal London) this is the biggest financial decision many people will ever take.
To help people make the right decisions, anyone transferring more than £30,000 must take financial advice. However, we believe that you shouldn’t see engaging with an adviser as a way of ‘rubber stamping’ a decision you have already made. Letting the adviser consider your circumstances and make a full recommendation to transfer or remain in the scheme, is the only way of ensuring you get the outcome that’s right for you in the short, medium and long term.
“At Boolers, you know that things will be dealt with properly and professionally. A real safe pair of hands!”
“I have always found the quality of advice, technical knowledge and level of service is second to none. ”
“Thank you to all of you for such a wonderfully smooth transaction! Hope we can do it again some time.”
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