FTAdviser has reported that the pension industry (including ourselves at MFP) are calling for more Defined Benefit (known as ‘final salary’) pension schemes to offer partial transfers of benefits to let retirees take advantage of pension freedoms.
Pensions consultancy firm Xafinity observed a small number of pension schemes beginning to offer this service, allowing their members to take part of their guaranteed income as a lump sum.
Xafinity head of proposition development Paul Darlow estimated around 10 per cent of schemes were doing this, but added it was “definitely on the rise”. He said the bigger, more customer-oriented schemes were the most likely to offer the service.
This could be particularly beneficial to those scheme members for whom a full transfer would create a tax charge by pushing them past the £1m lifetime allowance, or allowing members to cover their minimum income requirements from the scheme and transfer the balance.
Partial transfers could be in the interest of both members looking for more flexibility, and sponsoring companies looking to reduce their liabilities. However, final salary scheme members do not have just one pension, they have lots of little bits of pension which increase at different rates. That means it’s very difficult to transfer less than 100 per cent.
For example, benefits accrued before 1997 did not have to increase at all; those accrued between 1997 and 2009 had to rise by inflation up to 5%pa; and those accrued after 2009 had to increase by inflation up to 2.5%pa.
To overcome this, schemes could offer transfers of these different distinct parts of the pension.
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