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More about cashing in pension benefits (or not!)

More about cashing in pension benefits (or not!)


I wrote earlier in the year about the issue of cashing in final salary pension benefits and there have been some developments since then that are worth catching up on.

There wasn’t space in the previous blog to give a trade union perspective on the wider issues associated with the increasing trend to take transfer values from final salary pension schemes.

The factors that have driven up transfer values to 30 or even 40 times the projected annual pension income from the scheme – low interest rates etc. – are some of the same factors driving higher estimates of pension scheme liabilities and causing companies to propose reductions in benefits and closing schemes to future accrual. Some relief from these conditions would be welcome and would benefit Prospect members overall.

More generally, trade unions support the collective nature of final salary pension schemes and taking a transfer value because the terms offered at the time seem generous obviously runs counter to this.

But whether to take a transfer value or not is an individual choice and individuals will take their own circumstances and preferences into account when making a decision.

My last blog went into detail on the mechanics of the process and the general factors to take into account, so I don’t intend to cover that ground again.

Prospect members who are contemplating taking a transfer value should ask themselves if they are confident about managing such a large sum of money and whether they want to take on the risk of ensuring they get sufficient income throughout retirement from it?

Data published since the start of the year shows the scale of the phenomenon of people taking transfer values.

The Pension Regulator estimates that 80,000 transfers were carried out last year. A recent survey by the mutual insurer Royal London found a growth of more than 50% in the volume of transfers over the same period.

Royal London also found that the most common transfer value was in the £250,000 to £500,000 range.

In January, the Financial Conduct Authority issued an alert on advising on pension transfers because they were concerned that scheme members were at risk of transferring into unsuitable investments or even being scammed.

Last month, the FCA published proposals for updating the rules governing the advice given to pension scheme members considering whether to transfer benefits from a final salary pension scheme.

One of the proposals is to remove the existing guidance that an adviser should start from the assumption that a transfer will be unsuitable and replace it with a statement that, for most people, retaining safeguarded benefits will likely be in their best interests and advisers should have regard to this.

Overall, the requirements on advisers could become more onerous and the FCA estimates that the cost of providing advice will increase by £1,625.

So what we have learned since I last wrote about this issue is that increasing numbers of people are deciding to cash in final salary pension benefits but there are still many reasons to think things through very carefully and take good quality advice before doing so.      

Neil Walsh

Neil Walsh


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