Cashing in a Pension – tempted by Pension Enhancements?

Cash in Pension” offers from company pension schemes are being offered by more and more employers at the moment. They are tempting staff with “Enhanced Transfer Values” (ETVs) for those who transfer out of their final-salary-linked pension scheme or offering a higher pension now, in return for giving up future inflation-linked increases.

A recent article in Citywire warns that these offers may seem tempting at first, but are more likely to benefit the company than the employee –

“Steve Webb, the pensions minister, has said he is not happy that so many companies are offering pension-scheme members what are effectively bribes to give up some of their benefits or transfer to a Sipp or personal pension. Pension experts point out that since the aim is to save the company money, these offers are rarely in the interests of employees.

Companies are offering ‘enhanced transfer values’ (ETV) to employees who transfer out of their final salary linked pension scheme, or higher pensions today in return for forgoing future inflation linked increases. With final salary pension schemes now facing a shortfall in funding, a ‘black hole’ of £295 billion, according to accountants KPMG, there will be many companies feeling the pinch.”

However, they go on to suggest that their may be some cases where the offer to “cash in your pension” may be worth considering – people with high earnings who are unsure about the long-term safety and stability of the company pension scheme –

“Although most employees will be better off staying put, some may be best taking the money if they feel the company or pension scheme could be in trouble. This is because those who earn around £50,000 a year or more will not receive full compensation from the Pension Protection Fund (PPF) should their company get into difficulties.

For those still working and not yet at retirement age, the maximum compensation under the PPF as of April 2011 is 90% of accrued pension at the date the pension fund is taken over by the PPF. But there is a cap, which means that maximum compensation is £29,897 at age 65, after the 90% cap has been applied. Assuming a person is in a final salary pension scheme and expects to retire on two-thirds of final salary, in today’s money a rough calculation means that anyone earning around £50,000 a year or more won’t get full compensation for their lost pension.”

They also suggest that people suffering from ill health may be better off taking up the “cash in pension” offers, to get the benefits of a higher ETV or increased short-term pension. Of course, these sort of decisions should not be made lightly! Consult an Independent Financial Advisor before taking a decision that could significantly affect the value of your pension in the future.