Informed Choice chartered financial planner Martin Bamford was quoted in The Times on Saturday, in an article looking at the methods used by pension schemes to encourage their members to give up benefits.
It is becoming increasingly expensive for pension schemes to provide the defined benefits they have promised to members.
With all of us living for longer and investment returns generally lower, it should come as little surprise that pension scheme trustees are looking for ways to manage scheme liabilities.
Two of these methods are the enhanced transfer value and the pension increase exchange.
Schemes offer members an enhanced transfer value in return for transferring their benefits out of the scheme. This can take the form of a higher cash equivalent transfer value, as a cash incentive to transfer away, or a combination of the two.
Commenting in The Times, Martin said:
“Transferring out of a defined benefit pension scheme is rarely the right thing to do.
“It can be tempting to accept cash today in return for lower pension benefits in the future, but these are valuable and will be what pays for your lifestyle in later life.”
A pension increase exchange is an uplift to current pension benefits in return for giving up future inflation-linked increases.
Whilst not as financially dangerous as an enhanced transfer value, Martin pointed out in The Times that they carry the risk future pension benefits will be eroded in real terms by inflation.
If you are a member of a defined benefit pension scheme and you receive either an enhanced transfer value or pension increase exchange offer, you should always seek professional independent financial advice before making a decision.
In many cases, the pension scheme will offer to pay for such advice. Even if you have to pay for advice yourself without help from the pension scheme, it will be money well spent to ensure you make the right choice about valuable pension benefits.
Photo credit: Flickr/Ben Sutherland
