Final salary pension transfer have seen a surge in the past few years, but did everyone make the right decision? Or could many people have left themselves out of pocket and able to make a claim?
These days, few companies still offer final salary pensions to their employees. Once far more common, final salary pension schemes offer members some rare and valuable benefits, perhaps most notably, a practically guaranteed income for life.
But that hasn’t stopped many people receiving financial advice to leave these valuable benefits behind and transfer out of the schemes into private ones. But why?
Well, many of those that transferred away over the past ten years were told that there were a number of seemingly great reasons, but many don’t outweigh the benefits of staying in the scheme.
Final salary transfer: Pros and Cons
Final salary pension schemes are defined benefits schemes. They are guaranteed to pay out until death, are protected up to 90% by the Pension Protection Fund, are index-linked to help keep pace with inflation, and should you die before drawing on it, you are likely to pass on 50% of your pension to your spouse, or to a dependent child under 23. They also cost scheme members nothing to run.
In comparison, the amount a private pension eventually pays out in retirement depends on how well the pension fund performed, which is of course, is at the mercy of the markets, which means you may even lose money through a private pension.
Not only that, but private pensions often represent a finite pot, one that you can outlast if you live long enough.
That being said, a final salary transfer could be the right decision depending on the circumstances. For instance, if you have a shortened life expectancy and wish to spend your pension earlier, or if you are unmarried and have no children you wish to pass your pension on to.
But generally speaking, a final salary pension transfer is unlikely to be the right route for most people to go down.
So why do people do it?
High pension transfer values and bad advice
Because people (on average) have been living longer, many companies are finding final salary schemes expensive to run, and some may prefer it if scheme members transfer away. Because of this, some transfer values (how much a pension is worth if you transfer it) have been historically high, making a transfer look more tempting.
Added to this, is how much financial advisers can charge for giving advice and facilitating a final salary transfer – often thousands of pounds. More than enough incentive for some financial advisers to skip over some of the details and recommend a transfer when it may have made more sense to stay put.
Many people simply don’t realise they are swapping certainty for uncertainty. In some cases, people have lost their entire pension worth hundreds of thousands of pounds in transfers into high-risk investments that later got valued at zero, despite their adviser telling them it was a relatively safe transfer.
Many more people may still be looking at their transfer as a good thing as they see their fund growing, but may see the effects much later.
Action over Final Salary Pension Transfers
The Financial Conduct Authority, which acts as a rule-maker and watchdog for the financial services industry, tells financial advisers to start from the assumption that transferring a final salary pension is unsuitable, and to work from there when needed. In 2017 and 2018, several companies that gave large amounts of advice regarding final salary pensions have had their authorisation taken away, and have since gone out of business when they couldn’t prove that the advice they gave was suitable.
There are cases where a final salary transfer is the right way to go, and an honest, regulated adviser should be able to help work this out. But because of high transfer values and tempting fees, many people receive negligent final salary advice. Make sure you always take regulated financial advice, and get a second opinion if needed.
Tom Iveson works for claims specialists Get Claims Advice and often writes about mis-sold pensions and SIPP. Check out his blog on final salary transfer claims.