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Yet another ‘80’s revival? - news article image

Yet another ‘80’s revival?

15 Jun 2017

2 minute read

Back in the day, defined benefit or final salary pension schemes were the “gold standard” of pensions. You joined them when you started work and knew that when it was time to retire you had a guaranteed income for life and something for your spouse when you died.

In the 1980’s, with the introduction of flexibilities with personal pensions there was a mis-selling scandal. People were persuaded to forego the boring, old-fashioned final salary pensions in favour of more flexible personal pensions.

Over the years we have seen defined benefit schemes closed, first to new employees and subsequently to existing members. Schemes proved too expensive for companies to run. Having an old defined benefit scheme from early employment became a real plus as it gave some security following global financial disasters.

Coming up to the present day and flavour of the month is once again transferring final salary pensions into personal pensions following the introduction of increased pension flexibilities. The ability to take as much out of a pension as you want when you want after the age of 55 has come at a time when, for many, this offers the solution to household problems such as paying off interest only mortgages.

What has really boosted the interest in transfers recently however has been technical rather than sociological. A long period of low interest rates and quantitative easing has seen 15 year gilt yields drop from 5.27% in June 2008 to around 1.5% today. This plummet in gilt yields has meant that transfer values have climbed, in some cases to levels that frankly seem ridiculous. Multiples of 30 to 40 times are common now and we have even seen an offer of c£400,000 as a transfer value for a c£4,000 per annum pension.

Multiples like this can make what seems like a small part of your retirement planning suddenly seem like a potentially major asset. One unexpected consequence however is that a final salary scheme that is within the Lifetime Allowance can produce a transfer value that exceeds the Lifetime Allowance. What can appear as a boost to the pension becomes subject to a 55% tax liability and this cannot be ignored.

Looking at a large transfer value, the tax free cash lump sum figure is likely to be bigger from a transfer and without the complexity of commuting income for cash. Benefits payable on death will look much more attractive as a large lump sum for the family than just a spouse pension. Health issues may make the prospect of an income for life seem less valuable. Then there is always the question of whether the company pension is as safe as it looks depending on who the company is.

However attractive a transfer may look, this still means the conversion of a guaranteed, increasing income for life with security of an ongoing income for a spouse following death, into a lump sum that needs investing and managing. There would be few reasons to transfer a final salary benefit to then purchase an annuity as those factors that act to increase the transfer value then work against you when buying an annuity.

So it still comes down to a question of risk and your willingness and ability to accept that risk and manage it. Investment risk is the obvious one and you may be comfortable with all the risks but if you died, would your spouse be so confident? Inflation risk cannot be underestimated. Low inflation now is fine but if prices increase over a 20 to 30 year retirement then it becomes your problem to manage.

A complex area with the temptation of a seemingly large amount of money on offer so no wonder the government has laid down that professional advice has to be taken.

This article is intended for general guidance only and should not be relied or acted upon as specific advice

Warning: Your capital is at risk, the values of investments can fall as well as rise and you may not get back what you invest.

Yet another ‘80’s revival? - news article image

Author:

Ed Gibson

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