Should I cash in my final salary pension?

Written by:
'The government Green Paper published this week suggests a move from RPI to CPI which could leave pensioners with a lower than-expected income in retirement. I am a member of a DB scheme but don’t plan to retire for at least five more years. With all the uncertainty am I better off transferring my final salary pension now?'
Should I cash in my final salary pension?

Andrew Pennie of advisory firm Intelligent Pensions replies…

If you are still an “active” member of the DB pension scheme, then a transfer is probably not a sensible consideration. Within about five years of retirement, active members are likely to be benefitting from something known as ‘inter-generational cross subsidy’ and high employer contributions.

However, if you have left the scheme or it is closed to building up future benefits, then you might wish to explore your option to transfer. This might be particularly attractive if you want the flexibility to access your pension before benefits are payable and/or you are prepared to take on additional investment risk in the hope of growing your pension fund beyond the value of benefits being given up.

There are a number of factors to consider before transferring, not just the transfer value being offered. These include your health, your priorities in retirement, your attitude to investment risk, the death benefits payable under the scheme and the ongoing success of the sponsoring employer and your need for flexibility when accessing tax-free cash and income.

It is a complicated decision to make, and there is a legal requirement for you to take specialist advice. It is vital you understand what you are giving up before you actually do.

You are right the government Green Paper did, suggest greater flexibility about indexation of DB benefits which could see employers changing pension income increases from an RPI basis to CPI. Any change would have a negative impact on your retirement income; it would increase at a lower rate than the RPI increases most schemes are currently bound by. The cost to the employer would fall because they would be paying out less and as a consequence, DB transfer values would also be expected to fall.

While a future change in indexation may be a concern, it will never be the sole reason to justify a transfer.

It is also worth noting that many of the initiatives in the Green Paper are designed to help employers who are struggling financially to meet their DB funding costs; nobody wants another BHS pension scandal. If your scheme remains well funded, the likelihood of a change in indexation, or any of the other initiatives in the Green Paper, is reduced and should be less of a factor in your consideration.

If, however, you are aware that the scheme is significantly underfunded and that your employer is struggling, you might want to consider a transfer regardless of any forthcoming change in legislation.

Finally, the paper is still just a consultation and no rules have yet been passed. As specialist advisers, we can’t advise on speculation about what could happen in the future and would only recommend a transfer where we can demonstrate it is suitable for you to do so.

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