Minister of State for Pensions, Steve Webb, Steve Webb is considering banning cash incentives offered to savers to transfer out of their final salary schemes, according to reports today. Laith Khalaf, Pensions Analyst, Hargreaves Lansdown, explains.

Cash is one form of incentive that is sometimes offered to members of final salary schemes to transfer their pension to a DC (Defined Contribution) pension. Another common incentive is an enhancement to the transfer value, which remains within the pension. Savers who are offered such incentives should start with a healthy dose of scepticism. The employer is looking to save money by offering these incentives, therefore you are likely to be giving up more than you are gaining.

Final salary benefits are so valuable because: They are guaranteed by the employer, there is no investment risk, there is no annuity rate risk and they are inflation-linked and come with a spouse’s pension. However there are certain circumstances where you might want to transfer from a DB to a DC scheme. For instance if: you are single, final salary benefits include a spouse’s pension and this will be reflected in your transfer value, if you are single you might be able to secure a higher income by taking the transfer value and buying a single life annuity, or you have medical complaints. A final salary scheme doesn’t take account of these, whereas if you take the transfer value you might be able to buy an enhanced annuity which could provide you with a higher income. You want the flexibility and control of capped or flexible drawdown- you need to be aware you are probably paying a price for that flexibility, but you may be willing to pay it.

Your scheme is in the red and your company is in trouble, so you are concerned you will end up with PPF compensation- this can be a particular worry for those with big final salary scheme entitlements because the PPF offers maximum compensation of £29,897 per annum. If you have built up an annual pension of £50k a year you have a lot to lose if your scheme falls into the PPF. The PPF also doesn’t provide any inflation increases on benefits built up before 1997.

You may be able to access a higher tax free cash sum if you transfer to a DC scheme.

Members always have the opportunity to transfer out of their final salary scheme; incentives sweeten the deal for those who want to. However where the information or advice given to members is one-sided or insufficient there is indeed a risk that they will make poor decisions which damage their retirement prospects. There are many pension saving decisions that investors can make themselves, however when it comes to transferring out of a final salary scheme they should always seek independent financial advice. In the majority of cases this advice will conclude that the member should stick with their final salary scheme.

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