Cash in your final salary pension but still get an income for life
Savers who are unsure about giving up their final salary or defined benefit (DB) pension may have a halfway house option, which would give them flexibility while allowing them to retain a guaranteed income for life.
An estimated half a million people have cashed in their DB pension scheme in exchange for a lump sum transfer into a defined contribution (DC) arrangement since ‘pension freedom’ rules were introduced in 2015.
Such transfers have become a controversial topic because in most cases, they are not in the best interest of the saver as they involve people giving up their guaranteed pension income in retirement.
Even the Financial Conduct Authority (FCA) has said it is “concerned and disappointed” about the levels of transfers being recommended by financial advisers.
However, a little-known option could be the answer for people who do not want to give up their entire rights in the DB scheme.
A ‘partial transfer’ involves the saver transferring just a portion of their pension as a lump sum.
They would still have a secure guaranteed level of income through retirement from their DB scheme, but they could also benefit from the flexibility of the portion transferred into a DC arrangement.
At the moment, pension schemes are not obliged to offer partial transfers, but they have started to become more common.
A survey by consultants Lane Clark & Peacock of more than 100 occupational pension schemes found that the proportion of schemes offering a partial transfer option had risen from 15 per cent in 2017 to 22 per cent now.
One high profile example is Ford Motor Company, which announced it would offer partial defined benefit transfers to members late last year.
However, they are not solely the reserve of large schemes. Around two thirds of the schemes in the survey offering partial transfers had assets of under £500m.
Jonathan Camfield, partner at LCP, said: “Our research shows that growing numbers of schemes are offering partial transfers and this is to be welcomed. But many more could make this option available to their members.
“Although there are technical and practical issues which schemes would need to address, large and small schemes have already demonstrated that these can be overcome. Greater access to partial transfers would benefit members and also schemes, by reducing risks in the DB transfer process”.
Financial advisers support partial transfers, with 5 in 6 saying they would like to see more schemes offering them, and two thirds thinking it should be a legal right, according to research by Royal London.
Steve Webb, director of policy at Royal London, said: “Pension freedoms give people new options to shape their retirement wealth in the way that is right for them. But for too many people this is an all-or-nothing option, involving giving up all of their guaranteed pension income in retirement.
“We would like to see far more schemes offering partial transfers, where members can retain a secure pension but also enjoy greater flexibility. This genuinely could be the best of both worlds”.
For more, see: Five reasons to transfer your DB pension (and five not to)