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Is now the time to cash in your final salary pension?

Posted on 19 December, 2016

The millions of people who save into final salary pension schemes have always faced the temptation of transferring their savings to an alternative pension.

While final salary or “defined benefit” pensions pay a guaranteed income for life, they are not as flexible as the alternative “defined contribution” plans.

Under the latter, you can take multiple lump sums and pass any unused savings down the generations free of inheritance tax. In a final salary scheme income is typically not paid after the death of the member’s spouse.

Transferring from a final salary to a defined contribution pension means giving up a regular guaranteed income for a much larger lump sum, typically 20 times the promised annual pension.

We could be at or near the peak of the deals being offered to members to transfer out of a final salary plan.

Schemes value their pension promises on the basis of the yields paid on government bonds or gilts. When these yields fall, pension liabilities shoot up.

Jon Greer of Old Mutual Wealth, the pension company, said: “The combination of falling interest rates and low gilt yields has resulted in a general increase in the transfer values from final salary schemes.

“However, a shifting economic landscape threatens this favourable scenario, meaning that now could be the optimal time for people to cash out of final salary entitlements.”

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