Speaking to a newspaper recently, the chief executive of the Pension Protection Fund warned people not to expect total certainty that their final salary pensions would be paid in full.
The PPF is a safety net scheme that pays out if a final salary pension scheme cannot pay most of its benefits due to its company going bust. It does not pay out the pensions in full and the reductions people can suffer will vary significantly from case to case.
There will be unscrupulous firms encouraging people to take a transfer from their final salary pension scheme, perhaps using the PPF’s warning as justification. It is a difficult area to generalise on, as it is impossible to predict with certainty whether moving your pension is a good idea or not.
It is worth recalling the pension transfer scandal that occurred after 1988 when the Government relaxed the rules and salesmen had a field day. I played a leading role in making sure millions of people were compensated for this during 1998-2002.
UK plc has a massive pension deficit of over £300bn, which it is obliged to make good. If people will take a smaller sum of money and leave their pension scheme that is a cheap way of fixing the problem. With people now able to spend their pension money as they please at retirement, the temptation to take £250,000 for £10,000 of annual pension might be too great to resist? When you understand that it might cost the company £350,000 to secure this pension you can appreciate why the deal could suit both parties – at least for now.
Advisers are going to be in the middle of this, as all transfers to a retail pension over £30,000 require advice. The FCA has acted to close down the known loopholes that could have been used to avoid this requirement.
I start from the view that taking the transfer is not generally in clients’ best long-term interest and look for any exceptions. The circumstances in which it may be in their best interest to “take the money and go” are:
1. The pension is well above the reduced level the PPF will provide should the company go bust.
2. The company offering the final salary pension is in financial difficulty.
3. They are in poor health.
4. They are single or have dependents the final salary pension does not provide for.
5. They have high debts or expensive debt you need the capital to pay off.
Clients may want access to the capital just to spend more money up front. In doing so they are likely to be worse off in the long term. They could consider borrowing some money up front and re-paying it from the pension, which might be cheaper. Failing that, they could transfer just some of the final salary pension using a “partial transfer”. Partial transfers are not universally available though from final salary schemes.
They may wish to leave an inheritance for their children if they die and want to take the cash. Instead, you could suggest they keep the pension and use it to buy life insurance. They could end up with more secure income while alive and a lump sum after they are gone.
If a client is in poor health then taking a transfer is often a good thing for them – but it will not be for their pension scheme. It is no certainty as even those in poor health can live a lot longer than the average person.
The most difficult area is what happens should their former company be unable to put enough money into the scheme to pay their final salary pension in full. How secure is their pension and what would they get if it were unable to pay in full?
If a client’s final salary pension is above the cap the PPF provides (complex rules decide these; £32,761 is the cap for a 65 year old), then the amount they could lose is potentially too great to take the risk. They might feel it is better to have 80 per cent of the value for sure than take a risk – however small – of suffering, say, a 50 per cent loss. Again, exploring a partial transfer to move the part of the pension not adequately covered by the PPF might be sensible.
Alan Higham is retirement director at Fidelity Worldwide Investment