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The ban on final salary pension schemes transfer

The ban on final salary pension schemes transfer
Why is this being proposed? How would this affect you?

This article is for information only and no recommendation is being made or should be construed from the contents of the article. Always seek independent financial advice prior to taking any action.

Earlier this year the Government’s Work and Pensions Select Committee launched an inquiry into defined benefit (DB) pensions, or Final Salary Schemes as they’re more commonly known, to find a solution to the increasing pressures on retirement savings posed by rising life expectancy and stubbornly low investment returns.

The chairman of the committee was quoted as saying that the unsustainable promises made to scheme members were being “stacked up against” the jobs of younger generations and that without urgent action, “the impact on millions of people’s living standards from intergenerational trade-offs of income and wealth are brutal”.

This was further highlighted in the wake of the BHS fallout which saw yet more questions raised about the sustainability of final salary schemes and the potentially exposed position of the Pension Protection Fund.

As part of the Government enquiry, one option on the table is to give The Pensions Regulator more power over the way companies run their pension schemes. This would allow employers to reduce the pensions paid from their scheme if it is in deficit and the employer is unable to fully fund contributions – and these rules would also permit the company to do this without the agreement of the courts.

This could result in existing members rushing to transfer out of the scheme now before the company undertakes any reductions to future pension payments – which would cause huge problems for both the business and the pension provider.

To counteract this prediction, some members of the government and the committee have suggested additional regulations to sit alongside the proposed new changes to enforce a total ban on the transfer out of final salary schemes.

If this went ahead then members would be locked into a pension scheme where they cannot be certain of the future pension they will receive which, ironically, is one of the main benefits of a final salary scheme.

Aside from this point, what else would be affected by the ban?

Even though in the past, the Final Salary pension was always considered far superior to the Defined Contribution options, many people now are choosing to transfer out. The recent Pensions reforms and freedoms introduced over the past few years have really changed the market place.

One of the biggest reasons for many people transferring out of a final salary pension into a money purchase, or a defined contribution pension, is to do with what happens to the pension pot on death.

The income from the final salary pension scheme cannot be passed to other family members – meaning once the member dies the pension ceases. However, funds within a defined contribution pension can be passed on with the rest of the member’s estate. If the ban was introduced this would no longer be possible.

Other benefits for moving away from a final salary scheme are that a defined contribution scheme can offer improved flexibility of how income and tax free cash can be taken, plus it gives the pensions owner the ability invest their own funds however they choose, which does appeal to some.

This ongoing review is still only at proposal stage, and any definite changes from Work and Pensions Select Committee won’t be agreed and voted in for a while yet so there is still time to review your options.

If you would like some guidance on your existing pension scheme to make sure it is the best one for you or would like to investigate the possibility of transferring your scheme, give one of our professional pension advisors a call for a free initial no obligation review on 01892 300 303.

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