Final salary pension schemes offer defined benefits upon retirement based on your earnings and length of membership in the scheme, with a guaranteed inflation-linked income for the remainder of your life after retirement, and continuing perks such as death and service benefits. They are often considered the gold standard of retirement savings. Still, thousands of individuals have been sold final salary pension transfers that equate those benefits into a cash value – which does not always reflect the true worth of those benefits – resulting in hypothetical losses in the tens of thousands of pounds.
What is a Final Salary Pension Transfer?
Pension transfers from final salary pension schemes to defined contribution schemes such as a self-invested personal pension (SIPP) can appear lucrative for individuals because of high cash equivalent transfer values (CETV) offered as an equivalent to the associated benefits with a final salary plan. However, final salary pension transfers are rarely suitable because of the guarantee provided by a final salary pension agreement, which negates the element of risk associated with other pension schemes.
The value of most pension schemes fluctuates in relation to investment. If the portfolio of investments for a given SIPP performs well, the eventual value should hypothetically increase. Full access to a pension fund and control of its investments is one of the reasons that thousands of individuals have already proceeded with final salary pension transfers. And with the introduction of Pension Freedoms in 2015, where individuals over 55 years can release up to 100% of their final salary pension, the temptation to transfer out of it has been hard to resist for many.
However, the unfortunate reality is that those that have made final salary pension transfers have very often been mis-advised and are consequently suffering significant losses in amounts that only remarkable investment success would be able to rectify. This is chiefly due to stock market volatility.
How Costly Are Mis-Sold Final Salary Pension Transfers?
This is difficult to determine without accurate information pertaining to individual accounts, but in many cases, the gross ‘put-back’ figure, ie the estimated final value of the pension and its benefits had it been left in place, can be in the region of three times the Cash Equivalent Transfer Value (CETV), ie the value of lump sum originally transferred.
For example, an individual who transferred their final salary pension into an SIPP in July 2012 was offered a CETV of £97,744.72. Replacing the valuable, guaranteed benefits of the initial final salary pension scheme after five years and six months with the new SIPP would require a ‘put back’ figure in the region of £299,438, leaving the individual with a potential loss of £188,395. With our help, this individual was paid the maximum amount of compensation currently achievable – £50,000.
Another case study shows even greater hypothetical ‘put back’ costs worth three and a half times the CETV. The individual was mis-sold a final salary pension transfer with a CETV of £38,143. After six years and four months with the new SIPP, the gross put back figure was in the region of £134,909. After receiving the maximum amount of compensation, the individual has a potential future claim against the SIPP trustee worth £81,666.
This shows the financial pitfalls of final salary pension transfers, and why it is usually in your best interests to stay with a final salary pension scheme.
Please remember to always seek independent financial advice before making any decisions pertaining to your financial well-being. Seeking advice for pension transfers exceeding £30,000 is a legal requirement.
Final Salary Pension Transfers from Money & Me
Final salary pension transfers are nuanced and often difficult to understand, a fact that has resulted in thousands of pounds worth of compensation being awarded to individuals who feel they have been mis-sold a pension transfer. Operating on a no win – no fee basis*, Money & Me works to ensure that people are awarded fair compensation on any mis-sold final salary pension transfers.
*Please see our T&Cs for our full fee structure