What might you do with a final salary pension scheme now?
The previous article talked about the new pension rules as they relate to defined contribution pension schemes, also known as money purchase schemes. Defined benefit schemes, or final salary pension schemes will also be affected by the changes but to a different degree.
The Saturday Telegraph of 15th November 2014 had a number of articles talking about final salary schemes, some positive and some negative, reflecting both on the benefits of such schemes for their members and the likely impact of changes in April 2015.
One article was about the Bank of England pension scheme; http://www.telegraph.co.uk/finance/personalfinance/pensions/11230486/Britains-most-generous-pension-scheme-enjoyed-by-those-who-wrecked-yours.html
One about the possibility of exchanging a final salary scheme for cash; http://www.telegraph.co.uk/finance/personalfinance/pensions/11231489/Is-it-worth-ditching-a-final-salary-pension-for-cash.html
One about the drawbacks on surrendering a final salary scheme for cash; http://www.telegraph.co.uk/finance/personalfinance/pensions/11231474/Only-the-very-wealthy-should-cash-in-their-final-salary-pension.html
There are still quite a few final salary schemes left, but the numbers are falling fast and the benefits are being reduced dramatically for new members by various methods, transparent and opaque. For the big national schemes, like the NHS, Teachers Pension Scheme, Police and Fire Services, Civil Service, Local Government and the Armed Forces, the new rules are likely to require you to separate between funded and unfunded schemes. The Pensions Minister is currently consulting on allowing transfers out of final salary schemes and it is likely that unfunded schemes, like the Civil Service will be prevented from transferring out. This article covers the subject; http://www.ft.com/cms/s/0/084f514a-b8d3-11e3-835e-00144feabdc0.html#axzz3JPhiWIhX
To summarise a lot of noise and fury in the media, both general and specialist, some people might benefit from a transfer out of a final salary scheme into a defined contribution one; the seriously ill, those without partners and those with small deferred pensions and a long way to retirement. It is significant to note that most providers will not accept transfers from final salary schemes unless full advice has been given as they are very concerned with potential miss-sales.
A further level of complexity is added by the funding status of the final salary pension scheme. If it is underfunded, then any transfer out may be reduced dramatically in value. If it is likely to fail, then the promise of the Pension Protection Fund may be much better than the much reduced transfer value.
As an adviser, I would be very reluctant to suggest a transfer from a final salary scheme to a money purchase one unless the argument was very clear cut. The regulatory risk for the adviser is very high, so caution is the watchword. Stealing a woodworking analogy, “measure twice, cut once”, blundering in could be very expensive for all parties.
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