If I Had A Final Salary Pension Scheme, I’d Cash It In Now.
So says Financial Times journalist Merryn Somerset Webb in the weekend Financial Times of December 3 2016.
This is because defined benefit pension schemes value their pension promises on the basis of the yields paid on government bonds or gilts. But in recent weeks yields have risen from historical lows following the election of Donald Trump and expectations of higher inflation.
Rising yields slash liabilities and hence the amount of money that needs to be set aside now to pay future pensions, meaning that schemes may be about to reduce the amount they offer to people who want to transfer.
For example, analysts at Davy Stockbrokers in Dublin estimate that Bank of Ireland’s pension deficit, which doubled over the course of the first nine month of 2016 to €1.45 billion (!), fell back below €1.2 billion by the end of the year.
Offers for your final salary pension “won’t get any better”.
The Financial Times in a recent article (30 December 2016) explained that the leading pension consultants Willis Towers Watson said that, in the (UK) defined benefit pension schemes it administers, nearly five times as many members transferred out between April 2015 and October 2016, compared with the same period in 2013-2014. The article also mentioned two high profile people that have taken out pension transfers.
One is Baroness Ros Altmann, the former UK Pensions Minister, who told the Financial Times that she recently decided to cash in two of her final salary pensions after transfer quotes for both doubled over a two year period from 2014 to 2016.
“The sums were attractive to me and it was hard to imagine the offers going any higher” said Baroness Altmann, who stepped down as UK Pensions Minister in July.
She also cited the improved flexibility of a personal pension, while the ability to pass it on in the event of death (as per Irish Approved Retirement Funds ARF’s) was also seen as a reason.
The other expert is Martin Wolf, the Financial Times Chief economic commentator.
He has also announced he has cashed in two of his defined benefit pensions, telling the Financial Times “at current ultra-low interest rates, the transfer value of a defined benefit pension has become significantly overvalued. It seems sensible to take advantage of that fact. I have done so.
He went on “Could that be the wrong decision? Yes. But I would have to live to be close to one hundred and the pre-tax returns on investment would have to be zero – or less – over decades. IF the latter were true, capitalism would truly be dead. Moreover, if capitalism were dead, would the sponsoring company be able to meet its pension liabilities, in any case?”
As Baroness Altmann said,
“We may never see such good transfer values again”.
Here at EarlyRetirement.ie we can assist you if you are considering transferring to a Personal Retirement Bond which can give you immediate access to 25% of your pension fund as a tax free lump sum.
(Subject to a maximum of €200,000).