Is Selling Your Pension A Good Idea Part Ii

Is selling your pension a good idea? Part II












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Is selling your pension a good idea? Part II

A Pensions Regulator spokesperson said that they were already issuing warnings in 2007. Yet they seemed to have stepped up to the plate to greater effect recently by effectively telling pension scheme members that the offers they are receiving are almost certainly not enough. That being said, there are occasions when it may be a good idea to accept their offer according to Mr. Khalaf. Each final salary scheme has a nominal value which effectively means the sum needed to buy an income that is of the same value as the pension rights already due to you. Such offers get enhanced should you decide to switch it to another pension scheme. Perhaps your nominal value is £80,000. In this instance, you may receive an offer of £120,000 from the trustee which is to be paid into the new defined contribution scheme.

On the surface, this seems like a fantastic deal for the consumer. However, it is worth noting that you will be assuming all the risk. Should your investments lose value over the course of time you will be stuck with a sum less than what was transferred by the time retirement hits. Annuity rates could also decrease which means that your pension fund will have to be bigger if you wish to buy the equivalent income when you retire.

Mr. Khalaf warned savers that the critical yield is vital. In effect, this is the return on investment required to end up with the same pension when you retire as you would have received under the terms of the old scheme. This will probably be a high figure because final salary schemes increase your benefits in accordance with inflation which is significant. Mr Khalaf advised pension savers not to think about switching if they are only a few years from retirement or if they require a critical yield of more than 6% as the risks will be far too high.

Transfer values are based on the purchase of an annuity that results in your partner or spouse’s pension. Those who are single may be better off switching as you could receive a higher single annuity by converting benefits paid to married couples. If you have health problems, an ‘impaired life’ annuity can be bought which rewards you with a higher monthly income so switching is sensible in that case. Because the transfer value offered is going to be based on annuity rates that are the current standard, a higher pension if you move is a distinct possibility.

If you are earning a high wage and think that your future pension fund viability is in question, switching may also be a good option. The Pension Protection Fund bails out pension schemes that have collapsed, so if your company’s scheme goes under due to huge deficits, you could end up receiving a much smaller pension sum than originally expected. Individual advice is vital in this instance.

The chief actuary of PricewaterhouseCoopers, Raj Mody, said that transfer deals will be used more frequently in future. They released a survey of 179 large employers in the UK which showed that over half of them planned to offer increased transfer values to members who have deferred their pensions and 8% of those surveyed had already done so. One third of these employers also stated that they aimed to offer immediate higher benefits to retirees if they agreed to give up future increases in their pension.

 

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