Code to end cash 'bribes' for transferring out of final salary pensions
Following concerns about the number of people being encouraged to move out of final salary schemes, a new code of conduct has been published to set out some firm rules on this type of pension transfer.
A new code of good practice designed to stop cash ‘bribes’ being offered to persuade people to leave final salary pension schemes has been published.
As the cost of providing defined benefit pensions, such as final salary schemes, continues to rise, more and more people are being offered incentives to transfer into defined contribution, or money purchase, plans.
These schemes invest in the stock market and place the risk firmly on the employee, rather than the employer. By contrast, all the risk for paying out a defined benefit pension lies with the employer.
The Government and regulator the Financial Services Authority (FSA) have become increasingly concerned about people being persuaded to leave final salary schemes when it’s not in their best interests.
Voluntary code... at the moment
While the new code is voluntary, insurers have been warned that it could become law if bad practice continues.
Under the code of practice, the employer is also supposed to pay for the employee to have independent financial advice and offer at least three months for them to consider the offer
Government figures show that over 80% of these type of pension transfers last year involved a cash incentive.
Last month, the FSA tightened its guidance for financial advisers when they are calculating whether a move out of a final salary scheme is in a person’s best interests.
Ed Bowsher wrote more about some of the methods employed by advisers trying to get people to transfer in Don't fall for this pensions rip-off.
When it makes sense to transfer out of a final salary pension
There are a couple of circumstances when it might make sense to transfer:
- You're seriously ill, so you’d like to access as much of your money as you can. If you transferred, you could take out a tax-free 25% lump sum from your pension pot in your late 50s.
- If your employer is in serious trouble and the pension scheme has a large deficit. If the company goes belly up and the pension scheme becomes insolvent, the Pension Protection Fund will pay you a pension, up to a maximum of £29,897 a year. If you’re expecting a final salary pension that’s above that figure, it might make sense to transfer and receive a bigger income from a defined contribution pension.
Whatever the circumstances, get some independent financial advice before you decide what to do.