Rush to cash in final-salary pensions

A former pensions minister and several FTSE 100 executives have joined a stampede of savers cashing in “gold plated” final-salary company pensions after transfer offers reached record highs this year.

Financial advisers say that hundreds of millions of pounds have been paid in recent months to members of final- salary schemes who have not yet retired but opted to swap their future pension for a cash lump sum.

Final salary, or defined benefit, pensions are considered gold plated because they promise a secure, index-linked income for life, based on final or career-average salary. Most workers today are offered defined contribution pensions, where there is far less certainty over retirement income.

But, while financial advisers regard final-salary pensions as highly valuable and worth keeping for most savers, thousands have been tempted by cash-transfer offers that climbed to record highs as bond yields plunged after the June Brexit vote.

Transfer values have been offered at multiples of 30 to 40 times the projected annual pension income – and up to 50 times in some cases – achieving sums of several million pounds for individuals on high salaries.

The trend has been driven by low yields on government bonds, which increase the cost to pension schemes of funding pensions. Paying out cash reduces a scheme’s future liabilities. With gilt yields edging up again, big transfer values may have peaked.

LCP, an actuarial firm, said the average transfer value it quoted in the third quarter of this year jumped 25 per cent on the previous quarter to £368,000.

JLT Employee Benefits, which administers DB schemes, said that it had paid a record £32.5m per month in DB transfers this year, up 50 per cent on 2015.

Willis Towers Watson said that in the DB schemes it administered, nearly five times as many members transferred out between April 2015 and October 2016 compared with the same period in 2013-14.

Baroness Ros Altmann, the former pensions minister, told the Financial Times that she decided to cash in two of her final-salary pensions after transfer quotes for both doubled. “The sums were attractive to me and it was hard to imagine the offers going any higher,” she said.

Others cashing in included a dozen long-serving executives in one FTSE 100 company in a transfer totalling £30m, according to Hymans Robertson, an actuarial firm. Martin Wolf, the FT’s chief economic commentator, has also announced that he has cashed in.