Should I quit pension scheme or stick to it?

Published on Friday 29 May 2009 13:58

Q I am a former employee of a company and as a deferred pensioner (i.e., I have not yet retired) I am being offered an enhanced transfer value to move out of the employer's pension scheme.

Should I accept an enhanced transfer value or leave the money in the scheme?

AW, Dunfermline

A The first step would be for a transfer value analysis report to be undertaken by a suitably qualified financial adviser. This identifies what an alternative pension arrangement must produce (the critical yield) to match the benefits currently on offer from the existing scheme.

We all might have a different view on what a "reasonable" or "achievable" rate of return is on a pension. The attitude to risk, the age of the scheme member and the anticipated retirement age are very important factors to take into account.

A high critical yield (high single digit or more) indicates that the current pension benefits are valuable and that an alternative pension arrangement would have to perform very well and/or the scheme member would have to take on quite a high degree of investment risk which they might not be prepared to accept or which might not be suitable because of their anticipated retirement age.

It is also imperative to consider the financial strength of the employer company in question. Should a company go into liquidation, it is likely the trustees of the scheme will make an application to transfer the assets and liabilities to the pension protection fund (PPF). The PPF will then assess whether the scheme is eligible for protection. Once the PPF assessment period has begun, it is not possible to transfer out unless the member had previously received an offer of a transfer value and accepted it. Even then, trustees can still reduce the transfer value available. If the PPF does accept the scheme, no transfers out are allowed and the member will be entitled to PPF level benefits when they reach retirement. There are, however, limitations to this fund, including a compensation cap.

In conclusion, if you are concerned about the future of the company providing your pension benefits you ask an independent financial adviser to undertake the formal calculations and assess the potential risks involved in alternative strategies while at all times taking into account your own requirements and attitude to risk.

The ramifications of getting such a move wrong are patent and this is one area where independent advice is essential.

&#149 Gregor Munro is a financial adviser at HBJ Gateley Wareing. If you have a question you need answered, write to Jeff Salway, Personal Finance Editor, The Scotsman, 108 Holyrood Road, Edinburgh EH8 8AS or e-mail: [e-mail]. The above is for general purposes only and is not tailored for individual use. It does not constitute legal, financial or investment advice on any particular matter and must not be treated as a substitute for specific advice. No action should be taken in reliance of information given. The Scotsman Publications Ltd and HBJ Gateley Wareing accept no liability on the basis of this article.