Transfer ban proposed for final-salary pensions

Members of final-salary pension schemes who fear their employer might go bust – or believe they can get a better pension from another scheme – are likely to be prevented from transferring their money out, under new government plans.

As part of its consultation on new pension rules, the Department of Work and Pensions (DWP) is proposing a ban on “contracting out” of the state second pension into defined-contribution (DC) pension schemes from April 2012. However, because the majority of final-salary, or defined-benefit, schemes are already contracted out, this means their members will no longer be able to move to a DC scheme, such as a personal pension.

In general, most people will be better off staying in a final-salary scheme, but advisers say some investors might have legitimate reasons for wanting to transfer out.

Hargreaves Lansdown has identified four circumstances in which members might want to transfer: if they are concerned their employer will go bust; if they are in poor health and can get a higher income from an enhanced annuity; if they don’t have a spouse and can get a higher income from a single life annuity; and if the death benefits are better in a personal pension.

Laith Khalaf, pensions analyst at Hargreaves Lansdown said: “‘Abolishing transfers out of final salary schemes would restrict members’ choice without delivering any benefits.”

But a spokesman from the DWP said that if a final salary scheme is not contracted out, transfers to personal pensions would still be permitted.