Final salaries are in the new a lot at the moment, what exactly do we need to know about them?

The hot topic in financial advice at the moment surrounds members of defined benefit pension schemes (commonly known as final salary pensions) and whether to transfer benefits or not.

The flexibilities afforded to personal pensions in 2015 have led to many people looking at the viability of transferring defined benefit schemes.

The options of higher tax free cash amounts, retiring earlier, income flexibility and potentially greater death benefits have led to many looking into a transfer.

Over the last few years the transfer values of defined benefit schemes have, generally, increased significantly. Some members of schemes have seen transfer values increase by as much as 24%* over the last two years.

Such sizeable increases have led to many people asking the question “is now the time to transfer?”.

Transfer values have increased due to a number of factors; people living longer, investment returns, inflation increasing but the main factor is the falling returns (due to prices increasing) on Government bonds.

Defined benefit schemes are bound by legislation to back up liabilities by purchasing Government bonds. As the price of these bonds have increased so too have the value of the assets the schemes hold and therefore also transfer values.

Just because transfer values have increased, doesn’t mean that it’s a good idea to transfer. Fundamentals of financial planning, risk, objectives, capacity for loss and knowledge need very careful consideration when looking at options.

Defined benefit schemes provide members with exactly what their name suggests, a defined income in retirement. This secure, inflation proofed, income is potentially very valuable and should not be given away for a transfer value, regardless of size, without considering all the details very carefully.

Seeking advice over defined benefit schemes is key, however, it isn’t quite that easy! To advise in this area advisers must hold a specific industry recognised qualification, must be authorised to advise by the FCA and hold relevant Professional Indemnity Cover. Put simply, not all financial advisers can advise on defined benefit schemes.

The collapse of Tata Steel has also highlighted a problem. Members of the British Steel pension fund (which was adopted by Tata following the takeover of British Steel) have been seeking advice regarding their pension benefits following the decision to transfer members to the Pension Protection Fund.

With the large number of members seeking advice and the high number of those being advised to transfer, the FCA have looked at the advice given to the members. This review has provided worrying results where it appears that the majority of members have been advised to transfer without full consideration of all the required aspects, in particular investment experience.

This has led to the FCA removing advice from several firms in areas where British Steel were based, including Port Talbot and Scunthorpe and several legal cases now under way.

Sedulo Wealth Management do hold the necessary FCA permissions to advise on defined benefit schemes and the relevant insurance cover.
I’ve also helped design the new industry qualification required to advise in this area!

If you hold defined benefit pension benefits and would like to look at options available to you please feel free to contact a member of the Wealth Management team or email [email protected]

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