We are currently in a period where defined benefit schemes are being transferred in record numbers. Low long term gilt yields are fueling an unprecedented demand to forego the safeguarded benefits within such schemes for more flexible access to a pension pot.
Just last week, one of the largest pension administrators, JLT Employee Benefits, said it was transferring £750,000 per hour which equates to £100m a month.
For those who ask for a Cash Equivalent Transfer Value from their scheme, there is often a surprise how large the offer is compared to previous years. This has lead to a feeling of ‘transfer now while the going is good’ from many scheme members.
Reasons cited by those looking to transfer include protecting benefits for non-dependent children (not currently covered by the scheme pension), flexibility to access the pension pot as needed (rather than taking a pre-defined inflation proofed income), and access to a larger tax-free cash pot.
What many don’t realise, are the risks involved in giving up the guaranteed income, transferring to a pension which is reliant on stock market performance has no future guarantee of certainty.
An alternative to transferring the full benefits could be a partial transfer. Many treat the offer as an ‘all or nothing’ decision. A partial transfer could cover the requirements whilst retaining a level of guaranteed benefits.
From my own experience, many schemes still aren’t offering this feature, however Standard Life have recently come out and called for the FCA to make it a mandatory requirement in the upcoming Defined Benefit regulations.
“The FCA consultation is an important exercise in reaffirming good practice which we absolutely welcome. We would like to see it go that bit further and use the opportunity to embed the value of partial transfers in the regulations, so that a partial transfer must always be considered as an option for consumers during the advice process.” Said Alastair Black, Standard Life financial planning propositions head.
I would always recommend discussing this option with your advisor. Establish your need and see if they can be met without foregoing all the valuable benefits a defined benefit scheme offers.