Savers being warned against dashing to cash in gold-plated pensions

Savers are being warned against dashing to cash in gold-plated pensions, as they may get a better deal if they wait. 

Since 2015, savers in final salary schemes have been able to trade in their regular monthly pension income for a one-off lump sum. 

So far, more than 250,000 savers have cashed in their pension, pocketing a total of £85billion. 

Final salary pensions – also known as defined benefit pensions – tend to be so generous that they are rarely worth giving up. Nonetheless, savers are often tempted because the cash sums quoted sound so generous. 

These payments – known as transfer values, which are generally put into defined contribution arrangements – are often so high that they exceed the value of the saver’s home. 

The size of the lump sums has been falling in recent months, according to financial consultants Lane Clark & Peacock (LCP). 

Values dropped from just over £400,000 on average at the end of 2021 to just under £300,000 in the first three months of this year. 

LCP analysts fear that savers will dash to cash in their pensions before values fall any further. 

But it predicts that acting hastily could be a mistake as values could rise again. 

Clive Harrison, partner at LCP, warns that the value of lump sums has been falling in part due to rising interest rates, but there are plenty of other factors that could push values up in the future. 

He said: ‘Our research suggests that many schemes have improved their transfer values in recent years and that trend may well continue. 

‘We also find that for an individual member their transfer value is likely to increase as they get closer to retirement.’ 

He added: ‘Transferring out of a defined benefit pension is a big decision, which should always be made after taking careful note of expert and impartial financial advice.’ LCP research also found that although transfer values may look generous, they tend to be only around two thirds of what the pension is really worth. 

For example, a 55-year-old ten years away from a planned retirement on a pension of £10,000 a year might cash it in today for a £285,000 lump sum. 

It would cost £450,000 to buy an income of this size on the open market in the form of an annuity.