Employers with defined benefit pension schemes have been cautioned over offering excessively generous cash equivalent transfer value (CETV) pay-outs to members.
The Pensions Regulator has warned that generous CETVs - which offer members a single lump sum to leave the scheme, rather than a pension for life after retirement - could be having a detrimental effect on schemes’ long-term funding. It has already written to 14 schemes to encourage them to scale down their pay-outs.
A record £21bn flowed out of defined schemes in the year to March 2018 as people were routinely offered 25 to 30 – or even 40 times their annual pension as a lump sum transfer value.
Much of this activity has been driven by older savers who want to take more control of their own money, and also by employers who are keen to reduce the long-term cost of paying final salary pensions.
What does it mean for business?
While offering CETVs can be beneficial for both individuals and defined benefit schemes, the advantages need to be very carefully weighed up by both sides. Any employee who is considering leaving a defined benefit scheme must take financial advice before doing so. They will need to consider fees associated with the transfer, the ongoing costs of managing the money themselves, plus the risks involved in exchanging a guaranteed income stream for a lump sum.
If you would like further information, wish to discuss your company’s pension scheme or have members that require financial advice, please do not hesitate to talk to your Brunsdon Financial Adviser.
Please note that this article does not constitute specific advice. Brunsdon is not responsible for the content of third party web sites.