UK Final Salary Pensions – The £50BN Exodus

keep more of your money

It is now over 40 months, two elections and five Budgets ago since George Osborne turned the pension world upside down with his pension flexibility proposals. The majority took effect from April 2015 and have had a dramatic effect on how benefits are drawn from personal pensions and similar money purchase pension arrangements. Statistics from the Financial Conduct Authority (FCA) released earlier this year revealed that amongst those accessing their pension pots for the first time, using pension flexibility is more than twice as popular as buying an annuity.

The knock-on effects

The reforms introduced by Mr Osborne left the traditional final salary (defined benefit) pension scheme virtually untouched. Retirement benefits from such schemes remain largely inflexible: once the mix between pension and initial cash lump sum is decided, very little can change.

The original consultation paper on pension flexibility, published in March 2014, commented that ’…the government recognises that the attractiveness of transferring from defined benefit to defined contribution may increase as a result of the changes to the tax framework for how defined contribution pension savings can be accessed’.

That has proved to be something of an understatement. Although transfers from nearly all public-sector schemes have been effectively banned, one recent estimate suggested that £50bn had been transferred out of defined benefit pension schemes between April 2015 and May 2017 by 210,000 scheme members, an average transfer value of about £240,000 each. That near quarter of a million-pounds figure in part reflects the sharp rise that there has been in transfer values since the start of 2016.

Enter the regulator…

In June, over three years after the original flexibility announcement, the UK Regulator, The Financial Conduct Authority (FCA), issued a consultation paper on transfers from defined benefit schemes, proposing stricter advice requirements and a new form of benefit comparison which, at long last, accepts that most transfers will not now result in the purchase of an annuity. The regulator also subtly revised their stance towards such transfers. At present the FCA says an adviser should start from the assumption that “a transfer will be unsuitable”. The proposals remove this default assumption and replace it with a statement in the FCA’s Handbook that “for most people retaining [final salary scheme] benefits will likely be in their best interests and guidance that advisers should have regard to this”.

The FCA says that this different approach stems from the fact that “…the introduction of the pension freedoms has altered the options available and for some consumers a transfer may now be suitable when it wasn’t previously”.

Does this mean you should transfer your pension?

The fact that £50bn has been transferred out of final salary schemes is no reason to assume it is the right course of action in every instance. If you have private sector pension benefits from a former employer or a closed scheme of your current employer then, to paraphrase the FCA, you may be best off leaving them there. However, that is not the same as saying you should do nothing. You may be one of those people for whom pension flexibility means a transfer makes sense.

How can you tell where you stand?

AAM Wealth Solutions can provide you with a detailed UK Pension Audit, which will consider these issues in light of your needs, goals and circumstances and make a recommendation showing the right course of action for you to achieve the best retirement outcome.

Why you should have an AAM Wealth Solutions UK Pension Audit now

Every AAM UK Pension Audit is checked by Ian Black, a UK Qualified Chartered Financial Planner with over 20 years of experience in the provision of Pensions advice. Ian is the holder of the CII G60 qualification in addition to being a Fellow of The Personal Finance Society, the UK’s premier professional body for Financial Planners.

You will always receive a full recommendation on your Optimum Pension, whether that is the pension(s) you already have or an alternative.

An AAM UK Pension Audit will put you in an informed position, able to make informed choices about your Optimum Pension and how best to secure your perfect retirement.

Gather up the information you have on your old pension benefits and ask us to make an initial assessment. We can then advise you whether a more detailed analysis will be worthwhile.

Contact your AAM Financial Planner now to arrange your UK Pensions Audit or email 

Ian Black
Head of Wealth Solutions
AAM Advisory Pte Ltd


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