The recipients of ‘final salary’ pension transfers received £40,000 more than participants opting for the same last year, finds a recent survey. Workers with defined-benefit pensions are ditching regular monthly payments for these lump-sum payouts across the country.

The lump-sum payouts for participants swapping their guaranteed company pension for the former reached £275,000 in the current year, a rise of £40,000 from 2018.

The difference was identified in a survey conducted by consultancy XPS, taking into account over 1,800 transfers in June 2018 to March 2019 period. The last edition of the survey tracked over 6,000 transfers to reveal the latest trends.

Another critical insight revealed in the monthly figures released by the firm finds that companies are overpaying participants opting for cash outs.

Companies paid an average of £10,000 in additional payouts to savers opting to transfer out in March in comparison to the lump sum payments in February. £251,000 was the highest average transfer value received by a 64-year-old participant.

These are the highest level of payouts since the introduction of pension freedoms in 2015, which gave complete access to retirement savings to workers aged 55 or more. As per the current regulations, freedoms are available to participants, eligible for company pensions, only when they transfer out of the guaranteed income schemes.

As per the estimates of XPS, roughly 70,000 pensioners are ditching final salary schemes for lump-sum payments every year. One of the primary reasons behind this trend is the attractive valuations offered under the transferring out option, usually 30 or 40 times higher than the yearly income provided under the final salary scheme.

Experts are opined that final salary transfers offer twice the amount of tax-free cash in comparison to what a pensioner might receive when staying in the scheme.

The catch in the entire process is the one-way nature of these transfers- an eligible participant can opt for a transfer only if the pension has not begun. Similarly, once the transfer is complete, the participant cannot put that money back into the scheme.

SIPP (self-invested personal pension) was the most popular fund destination for participants transferring their pensions for self-management, as observed in the survey findings.

Despite the popularity of SIPPs, financial experts suggest investors stay vigilant while choosing a provider. Most of the investors opt and pay for features they may not need in the future. Additionally, associated charges and investment fees could have a detrimental impact on retirement income. Ideally, one should choose low cost, simple SIPPs for better results.

The Financial Conduct Authority is worried about the growing trend among savers to quit salary schemes for lump-sum payments. It is critical to understand that final salary schemes involve substantial employer contributions along with a consistent annual income, which grows in line with inflation, unlike other defined-contribution schemes.

Final salary transfers exceeding £30,000 require the involvement of financial advisers, who are finding it challenging to carry out these transactions under the new rules. One must note that these new rules were introduced after thousands of participants of the British Steel Pension Scheme received lousy advice from advisers for transfers, losing a significant portion of their retirement fund in advisor fees.