One of the major changes since pension freedom is the significantly greater interest in transferring out of final salary pension schemes. Historically, it was usually seen as a no brainer to keep a ‘gold-plated’ benefit.
But that is changing. Three-quarters of advisers qualified to give pension transfer advice say they have seen an increase in requests over the past year to move final salary pensions, with 40% saying the numbers of people enquiring had increased significantly.
A quarter of advisers have seen a similar level of business in the last year, while no advisers report less frequent requests, according to Retirement Advantage research.
This is backed up by Financial Conduct Authority stats showing that the numbers investigating final salary transfers are growing rapidly. This is perhaps being fuelled by greater customer awareness.
One benefit of pension freedom has been to show people that their pension is a valuable asset, which they have some control over, rather than a vehicle that generates an income, over which they have no say.
Customers are attracted by access to funds, flexibility over income and the ability to cascade unused funds down the generations after their death, and this combination may hold greater appeal than a guaranteed lifetime income.
Another driver is that over the past few years, transfer values have been higher than the historical average. How Brexit affects this remains to be seen. As a general rule, lower gilt yields – as we have seen over the past couple of months – usually lead to higher pension transfer values.
However, the current weakness in some markets may impact on the funding levels of schemes, and that could have a negative impact on transfer values.
The uncertainty may also affect the ongoing viability of some schemes and, for those with substantial benefits, any weakness in the sponsoring employer’s ability to support the scheme is worth taking into account.
Despite the obvious attractions that pension freedom offers, many people are likely to be better staying put.
But there are a number of factors which could make a transfer a viable option. The ability to pass unused pension wealth to family is a strong driver for many people, especially when contrasted with the often poor level of death benefits for those who have a final salary benefit with a previous employer.
Similarly, those who are single, widowed or divorced may benefit from the ability to reshape death benefits to suit their individual circumstances, compared to an irrelevant benefit provided by the scheme.
Final salary schemes lack flexibility, so a transfer can allow advisers to help customers control the amount of tax they pay.
Add in the potential for greater amounts of tax-free cash and possible health issues, and there are a range of reasons why a transfer may be worth exploring.
Uncertainty over Brexit
However, Brexit does cause some uncertainty. As the UK exit from the European Union will not happen until 2019, and as the precise outcome is unclear, markets have been (and will be) volatile. We can expect all asset classes to reflect this.
So retaining some element of guaranteed income may be desirable. Some final salary schemes are now willing to offer partial transfers and that is worth exploring where possible. Hopefully, this will increasingly become an available option.
Others may want to use an annuity and drawdown in combination, potentially through a new hybrid solution. A guaranteed income personalised to the customer’s circumstances, and taking into account their health and lifestyle, can be provided by the annuity element.
With an appropriate investment strategy within the drawdown element for the excess funds, there is much more flexibility and control than a final salary income can offer as annuity income not needed can be reinvested into the drawdown element, and lump sums can be withdrawn as needed from the drawdown.
Final salary transfers are increasingly on the radar, largely driven by pension freedom. Although there are risks for advisers and customers, great client outcomes can be delivered in the right circumstances.
Andrew Tully is pensions technical director at Retirement Advantage