Time To Cash In That Final Salary Pension?

If you have a Final Salary scheme, could now be a good time to cash in your pension? That was the question posed by MoneyWeek last month. They argued that a 30-year “bull market” for bonds may be about to turn bear-ish, looked at prospects for increases in inflation, and then discussed the pros and cons of cashing-in now –

“Imagine you had invested in something back in 2009 and it had returned 25% every year for the past seven years – a total return of about 480%. Then imagine that the value of that investment was 100% linked to the bond market. What would you do?

The market has taught us (over and over again) that returns of 20% plus are unsustainable over the long term. And it is beginning to look like the 30-year bond bull market might end with more of a crash than a whimper: the global bond market has just had its worst month in 25 years. So I think I know what you would do: you’d sell it – as fast as you possibly could.

You may be wondering what this fabulous investment is; it is a defined benefit pension scheme. Back in 2009, a friend of mine in his mid-40s asked for a transfer value for a fund expected to pay out the equivalent of £5,000 a year when he turns 65. The answer was £63,000 – 12 times the expected annual income. That was interesting, but not enough to be worth following up. An inflation-linked income (up to a maximum of 5% a year in this case) guaranteed forever is an unusually valuable thing.

He asked again this year. This time the answer was nearly £300,000 – 40 times the expected annual income (which is now more like £7,000). Wow. We all know by now what has happened here ¬– pension funds have felt forced to value their future liabilities based on long bond yields in the UK; yields which hit record lows earlier in the year. That has translated through to individual transfer values: the more bond yields have fallen, the more transfer values have risen. So much so that even the smallest of pensions is worth a rather large fortune.”