Leading Edinburgh-based financial adviser Robson Macintosh (Rob Mac) has urged caution as large numbers of Scots seek to capitalise on inflated values attached to their entitlements within ‘final salary’ based pension schemes. This has led to a surge in enquiries to financial advisers across Scotland over the last 18 months as many employees find out they are ‘pension millionaires’.
Final salary pension schemes offer a defined amount of salary, dictated by number of years worked, to be paid to ex-employees from retirement until death. Changing economic conditions and mortality expectations has led to many employers ceasing to offer these schemes in full, or part, because of excessive financial burdens. Employees can however, instead of waiting for pension payments on retirement, seek a ‘transfer value’ of their entitlements to alternative personal arrangements. The considerable increase in the current financial value of these amounts has sparked an advice rush across Central Scotland in particular.
Jeff Lewis, Director and Pensions Specialist, at Rob Mac said:
‘First and foremost final salary schemes remain the Rolls Royce of pension arrangements. Anyone giving up such entitlement must consider many factors and in most cases our review processes and analysis would fully support a ‘no change’ position. That has always been our start point and is still by far my most likely end point when advising anyone.
‘However, the forced closure of many final salary schemes, historically low interest rates and long term gilt yields , increased longevity , wider regulatory freedoms and the plethora of investment fund options to select from today have presented a multitude of new factors to fully consider.
‘Additionally it is increasingly likely that pensions legislation may change again over the next year. This could give Trustees of existing pension schemes more discretion as to how future benefits to pensioners are payable – for example reducing indexation levels of pensions in payment from RPI to CPI. It has been reported that this alone could reduce the financial deficits of final salary schemes by 15%. This will inevitably lead to reduced transfer values.
‘Many people are finding they now have a seven figure entitlement should they decide to transfer from their current or ex-employers final salary pension scheme. The glare of ‘pension millionaire’ status should emphasise to everyone to be on top of their retirement planning and ensure what they have is appropriate for their future life.
‘It is very much an individual assessment and can change markedly year by year. For example, at the end of 2015 I advised a client not to give up a final salary pension entitlement but only 12 months later the value attached to the same entitlement had increased by 45%. Even over such a short period of time it was right to change the nature of my advice and put in place an alternative which now better suits the client’s circumstances’.
