The Conventional Wisdom in Saying "No" to Pension Transfer Incentives

Should you be a "Yes Man" (or "Yes Woman") at work? Following orders within the confines of what we deem as ethical is simply one aspect of having a job. However, some grey areas exist regarding our retirement savings. For instance, should we accept every offer of our employer, regarding pensions? Recently, a rapidly increasing number of employers have been offering incentives to employers, to transfer their pension from a Final Pension scheme, into another pension scheme.

In fact, you might be surprised that such a pension transfer is even possible. However, a few years ago, the UK Pensions Regulator confirmed that indeed it is legal for employees to accept a cash lump sum from their employers, thus permitting the latter to transfer the workers' Final Salary pension.

Nevertheless, the Regulator was concerned that some employers were not totally aware of the repercussions and risks involved in taking such an action. Furthermore, the Pensions Regulator encouraged the trustees of schemes to inform their members of the implications that are involved in accepting the financial incentives. In fact, they recommended that they seek independent financial advice before making a final decision.

Many financial experts believe that pension schemes' trustees have not provided solid or sufficient information to their members. In fact, they oftentimes take a standoffish approach. This situation is problematic, as the trustees should consistently strive to provide the best advice to their members. For instance, the trustees should verify that when employers provide financial advice for their employers, that the advice is completely independent, and that they avoid arm-twisting with the hopes of increasing the number of employees who accept the pension transfer deal.

Why would Independent Financial Advisers be hesitant to involve themselves in such matters? Truth be told, transferring your pension funds from an Occupational Pension to a Personal Pension would typically –not- be the wisest option in terms of the employee's long-term investment plans. In fact, even the size of the cash lump sum that an employer would offer would not usually change that situation. That is because there is more assurance in the level of pension payable with an Occupational Pension, than with a Personal Pension.

Another important issue is that the Pension Protection Fund (PPF) now exists in the UK. The PPF guarantees employers a maximum of 90% of the entitlement for their Final Salary scheme, if the company becomes bankrupt.

Thus, the bottom line is that it is important for members of a pension scheme to determine if accepting the offer is in their best interest-in the long term. In most cases, it will not be. Oftentimes, employers make such an offer to cut their liabilities. Still, remember that even a broken clock is correct twice a day. You must do what is best for your long-term financial plans.

If something seems too good to be true, then it probably is. If your employer offers you a cash lump sum in exchange for transferring your Occupational Pension into a Personal Pension, think twice before saying "Yes."