Final Salary Transfer or Not?

MrLobster

I have a deferred final salary pension and am currently in another final salary scheme.
The deferred scheme has offered me an enhanced transfer figure if I transfer out before Feb 28th 2011.
The figures are £71k initial value with an additional £35k if I take their offer.
Would I be better off transferring it to my current scheme or putting it into a seperate scheme?
Thanks in advance.

Alex

dunstonh

Would I be better off transferring it to my current scheme or putting it into a seperate scheme?

Which one will give you the most benefit?

Loughton_Monkey

Final Salary Schemes should only be moved in the rarest of circumstances. Any 'bribe' to move simply indicates what good value they are and the 'bribe' will almost certainly be derisory compared with its true value.

You need to understand that a Final Salary scheme provides defined benefits - guaranteed. They do not have a specific fund with your name on it. Such schemes - even if in theory 'fully funded' - (which most are not) - has to add significant money over the forthcoming years to cover inflation, increased mortality etc. So any 'valuation' of the value of your own benefits is just an 'estimate' and probably a very cautious one (from their perspective).

The scheme of which I was a member is not untypical. Being the sort of person I am, I obtained regular 'valuations' of transfer over the years. Not because I wanted to transfer them, but just to get a valuation for my 'books'. The actual increases, year on year, in the final 10 years before I finally took it were absolutely astounding. One year in particular can have, say, a 15% or more increase simply because they are forced to recognise the ever improving mortality.

Take the money out, and you have lost that for ever.

rabbitmumu

woh !! It's a tricky question!!

So there are 3 options : (1) don't do anything , (2) transfer all to the new scheme, or (3) transfer all to a personal pension.

Given both the old and new schemes are final salaries and the old one is making a generous offer, I know it must be tempting. But please consider the following:

1. How many years will there be before you retire? The sooner it is , the less "risks" there are in making the following decisions.

2. How "safe" is your old/ new final salary scheme? You may have heard they're closing down final salary schemes so you need to consider. One thing you can check before the Feb deadline is their latest funding positions and if there's any Recovery Plan (i.e. how committed is the company willing /perpared to sponsor the schemes in the future if applicable). Of course everything can still change in the future, but looking at the current state will give you some ideas to compare.

3. How much additional pensions will you be receiving if you are taking option (2)? WIll your new company give you additional years of service (i.e. converted from the lump sum receive)? You may want to ask your current trustees/ administrator what your estimated additional pension would be because of this extra 106k.

Note that usually deferred pension (old scheme) only increase your pension by RPI/CPI before retirement, whereas your new company increase your pension by your salary growth rate (assuming your new scheme is not closed right?) , then technically salary growth should be higher than RPI and assuming all things being equal, you should be able to get more pensions by taking option (2).

However please don't quote me 100% coz' i haven't seen the transfer-in rules of your new Scheme. The other thing is that how many schemes are now accepting new transfers-in? You may want to double check with your current company as they may not let you anyway.

4. If you are taking option (3), then you may wish to speak to an IFA and you will need to make a decision in terms of how you wish to invest your money. And the values at retirement will no longer be "guaranteed" (although we all know that there's no guarantee under final salary schemes anyway).

The advantage of this option is you may have more flexibility before and after retirement. e.g if you also have other private pensions etc, you may have the option to take income drawdown and it's not compulsory to receive annuity (subject to future changes and value of your pensions though). Flexibility also comes with risks...

Hope this helps.

middlepuss

MrLobster, it's not the nominal capital value that matters. It's the pension that that nominal amount will get you in a) your old scheme, b) your current scheme or c) a separate scheme. Without knowing a or b nobody can advise whether a or b is better or whether c even comes close.

Afraid you have some homework to do.

MrLobster

Thanks for the advice.
I have asked my current scheme how many extra years it will give me if I transfer, and have just made an appointment with an IFA.
My previous scheme has been completely deferred for about six months now and I have heard rumblings from a good source that they are considering closing it. Apparently it is up for sale.
Again thanks for the advice and I will keep you posted.

Alex

vbm

I am a pension transfer specialist. This means I am registered with the FSA to approve these kind of transactions.

I would estimate less than 1% of the time it is a good idea to transfer. Even if it is in your interests to do it is likey to be only a small gain, however when people lose out they tend to lose a lot.

Can't be sure what your circumstances are, but if you do nothing you wont go too far wrong.

dunstonh

I would estimate less than 1% of the time it is a good idea to transfer. Even if it is in your interests to do it is likey to be only a small gain, however when people lose out they tend to lose a lot.

That matches our experience where we say 99% of the time the advice will be not to transfer.

magpiecottage

MrLobster wrote: »

Thanks for the advice.
I have asked my current scheme how many extra years it will give me if I transfer, and have just made an appointment with an IFA.

Two wise moves!

MrLobster wrote: »

My previous scheme has been completely deferred for about six months now and I have heard rumblings from a good source that they are considering closing it. Apparently it is up for sale.

That might explain the reason for the enhancement. If there are relatively few left in the scheme, the sponsoring employer may be willing to pay considerably over the odds to avoid the expense of continuing it just for a handful of deferred members.

vbm

Usually a compnay will offer an enhanced transfer value because it is cheaper than buying out the benefits with a deferred annuity provider and /or the costs of wind up are too great.