It’s recently made news that some very generous offers have been made to people with “final salary” pensions, prompting many to wonder whether transferring in the pension’s income for a cash lump sum is the best way they can make the most from the scheme.
Here are some factors you’ll need to look into before deciding to transfer your final salary pension. These factors can affect how much you are offered as a result of quitting the scheme, and are vital to take into account before taking the plunge.
As there is less time for a scheme to grow as you get older in order to meet the payments that are initially promised by it, final salary transfer values will rise as you get closer to retirement. This means that if you were to wait for a longer amount of time before transferring, you are likely to receive a larger lump sum when transferring.
Typically, the lower the standard “retirement age” set out by the scheme, the more likely it is that the final salary transfer values will be higher, as the pension would be paying out for longer. It’s also important to note here that it’s not possible to transfer your final salary pension if you are within a year of the retirement age set out by the scheme.
As final salary pension schemes pay out an annual income until a person passes away, the longer it expects its member to live means the more it will have to pay out as a whole. Changes in life expectancy can affect the transfer value, as if life expectancy was to change, this could increase or decrease the average transfer value of a scheme.
As most final salary pension schemes also provide a “dependant’s pension” that is paid out after the member passes away, transfer values of the scheme will be based on the assumption that every member is married. This means that a person who is single is likely to find that it would be better value for them to transfer their final salary pension rather than stay in the scheme.
The Cost of Living
The final salary pensions transfer value is, by law, required to change in line with the cost of living, meaning that if inflation is expected to be higher in the future, then the value of a transfer from a scheme will increase.
Long-term Interest Rates
Since the financial crisis, yields on government bolds, or “Gilt” yields, have reached record lows, meaning that transfer values have increased. These gilt yields determine the ratio of assets to liabilities for final salary pension schemes, and in turn, the final salary transfer value the scheme will offer its members.
As lower expected returns boost final salary pension transfer values, the pension scheme will need to set aside more money in order to meet payment promises to its members.
RPI v CPI
Depending on the rules of the scheme, a pension will increase in line with the consumer prices index or the retail prices index. This means that the final salary pension transfer value of a scheme can be affected by whether it focuses on RPI or CPI. Schemes can however in some cases switch index in order to cut costs.
If a company behind the final salary pension scheme is having difficulties financially, transfer values are likely to be reduced. Similarly, if a scheme falls into the Pension Protection Fund, transfer values will potentially be lower as a result of this.
How Much Your Transfer is Worth
If your potential transfer is worth £30,000 or more, you will not be allowed to transfer the final salary pension until you have spoken to a financial adviser. Here’s where KLO Financial Services can help! If you’re looking for financial advice regarding cashing in your final salary pension, talk to our financial advice team. Please call on 01926 492406 or email firstname.lastname@example.org to make an appointment.