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Transferring out of final-salary schemes is becoming more attractive

Should I stay or should I go has been a constant question in the minds of well-advised members of final-salary schemes for years. So the idea that some senior public servants could be better off out of their final-salary sch-eme than staying in can only make cashing in more attractive.

It goes without saying that the new flexible drawdown regime should prove attractive to those with big defined-benefit pens-ions. Many of those on course for an income-rich, cash-poor retirement will doubtless welcome the freedom to go for big capital projects soon after they stop working.

Now we have the situation reported in Money Marketing last month that some highearning doctors still accruing benefits could be better off out of their pension scheme than in. This is because the combined effects of increased employee contributions, the new £50,000 annual allowance charge and next April’s reduced lifetime allowance mean that for some, admittedly only a handful, the benefits are being outweighed by the costs. The clearest cases are those very close to retire-ment, where staying in a scheme past April 2012 will mean falling foul of the new £1.5m lifetime limit rather than benefiting from £1.8m by leaving before then. On paper, the numbers I have seen show the client better off by leaving rather than staying.

For advisers, however, comm-itting a recommendation to leave the NHS scheme to paper is a big step.

The trimming of the lifetime allowance creates a one-off problem for those close to retirement but even some high earners in their forties and fifties will be starting to wonder how much benefit they are accruing from being in schemes.

Many will already be on course to hit the new lifetime limit before they retire and some are likely to break the annual allowance at some stage.

The fact that you have to leave a scheme to get a transfer out of it has been a key impediment to public sector high earners taking advantage of the flexibility of defined-contribution pensions. But the more tax and contributions eat into what highearners get back in return, the easier that decision becomes.

Transferring out of public sector schemes sounds fanciful but several IFAs and providers I have spoken to in recent months have come across situations where the numbers are at least being looked at. How many of these will go through to completion remains to be seen but I bet some of those requesting transfer valuations now are wishing they had done so before last winter’s index-ation change. For those that stay put, nagging questions over how else the Government might move the goalposts will persist.

Many schemes do not let members transfer out in the year before retirement but will we start to see transfers in the year before that? Those running funded schemes will be hoping not. As for those in the private sector, the risk posed by trusting the entirety of your pension saving above the Pension Protection Fund level on fortunes of a single company remains – as the recent Silentnight scheme furore reminds us.

Of course there are many vari-ables. Will the lifetime allowance start to go up again in future? Will annuity rates go down? When it comes to pensions, nothing is set in stone. But for some well-pensioned public servants, flexibility will be what makes their retirement dreams come true. Flexible drawdown makes transferring out of gold-plated schemes seem a whole lot more attractive.

John Greenwood is editor of Corporate Adviser

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Comments

There are 4 comments at the moment, we would love to hear your opinion too.

  1. Incompetent Regulators Awards Team 26th May 2011 at 4:31 pm

    I agres, this is potentially good business where the client fully understands and clearly would benefit. But where does this leave IFAs with clients chasing the old ‘compo’ and up against the ignorant, under qualfied, box ticking target driven FOS adjudicators and ombudsman?

    With on of the biggest compensation bill ever!

  2. Caution Required 26th May 2011 at 5:13 pm

    Unsure as to the message in this article.

    I am a Pension Transfer specialist and have seen cases where those taking benefits under Statutory Schemes are having benefits scaled back due to the LTA. This is when those with significant service and salary have reached the outer benefit lmits. Nice problem to have.

    That said it is a brave Advisor who commits to taking an active member out of a Statutory Public Sector DB scheme. This fulfills two key issues – an opt out and a DB transfer.

    If ill health and legacy planning are serious issues then perhaps, case dependant, it may be attractive to transfer an active members benefits.

    Only an Opinion.

  3. Very dangerous ground.

    Now:

    Adviser ‘Mr Dr I recommend that you leave the NHS pension scheme due to the reduction in the LTA which will result in you being hit by a tax charge’.

    5 years later:

    Another U-turn by the government and the LTA is increased to £2.5 million – hello Mr Redress.

  4. sean | 27 May 2011 8:33 am ……

    Must agree with you here Sean as we have all been subjected to far to many retrospective decision by our quango police force regulator!

    Very, very dangerous ground one feels….

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