￡21m a day moved out of final salary pensions – should you join them?

There are numerous things to consider before ditching a gold plated pension

Jessica Beard 27 September 2021 Telegram

Hundreds of millions of pounds are poured out each week from private sector “final salary” pensions as savers have continued to transfer their life savings out of the gold-plated schemes in favour of flexibility.

An estimated ￡45bn has been transferred out of the largest British companies’ pension schemes since pension freedoms rules were introduced in 2015, representing more than ￡144m each week or ￡21m a day. That is according to research by Barnett Waddingham, a consultancy.?

More than?50,000 pension savers pull their money?out of final salary or "defined benefit" pensions every year, unlocking their retirement money by moving a lump sum into a personal pension and investing it themselves, or spending the cash.?

Britain’s four largest banks had the most significant withdrawals as current and former employees ditched their pension scheme, accounting for nearly half of all pension transfers. Barclays had the largest?amount pulled?from its pension scheme, with ￡4.2bn worth of retirement money withdrawn in 2017 alone.?

Mark Barlow, of XPS Pensions Group, a consultancy that tracks pension transfers, said banks offer some of the highest "transfer values" in the country. Defined benefit pots can be swapped for a multiple of the promised annual income, so a pension projected to pay ￡10,000 a year of income, might be swapped for ￡300,000 of cash in a personal pension, for example.

There are?ten or so key factors?you need to consider before deciding to give up guaranteed retirement income, including long-term interest rates, your marital status and how long you can expect to live.

Savers pulled more than ￡14bn out of final salary pensions in 2017

Many savers are likely to be enticed into making the switch, as the amount of cash they can receive for quitting defined benefit schemes has hit an all-time high.

Cash transfer values rose to a record high in August, figures from XPS, another consultancy, have shown. The estimated cash transfer value of a 64-year-old with a ￡10,000 a year pension, with inflation increases, was worth ￡264,300 as of 24 August. This marked a ￡22,0000 increase since values hit a low of ￡242,000 in February this year.?

Values have been driven higher thanks to a combination of rising inflation expectations and persistently low Government bond yields.

“The amount you can cash out rises because the scheme knows that you can get less returns in the market due to low yields and your money will be more likely to be eroded by inflation,” Mr Barlow said.?

The total transferred from the largest private DB schemes in the country reached a peak of ￡14.4bn in 2017, two years after the Government liberated pensions under former Chancellor George Osborne's reforms. Six years ago, over-55s were given the freedom to decide how they take their pension, whether they draw it as a single lump sum or keep it invested and draw an income as and why they please.

Final salary pensions | Is it a good idea to transfer out?

Simon Taylor, of Barnett Waddingham, said: “There has clearly been a huge amount of demand from members of DB schemes to access their pension more flexibly and draw income in a way that best suits their needs.” Tom Selby of investment platform AJ Bell said: "Leaving a DB scheme is always a big decision and anyone who chooses to needs to do so with their eyes open. However, there are perfectly legitimate reasons to transfer, from wanting greater flexibility to alter income payments to their needs."

But transfers have slowed in recent years as a result of heavy-handed regulation and rising insurance premiums, driving up costs for financial advisers.?To move out of a pension that contains any guarantees, you must first take advice from a?regulated adviser?if it is worth more than ￡30,000.

The City watchdog, the Financial Conduct Authority, has been?clamping down on poor advice?after a string of pension transfer scandals. The FCA has been adamant most savers are financially better off with a defined benefit pension.?

Moving out of a final salary pension may bring more flexibility but it also comes at a greater risk as it means shifting the entire nest egg into a personal pension, where returns are the responsibility of the individual saver, not scheme trustees.?