“Today’s announcement from Tata Steel may make those with final salary pension schemes nervous about the safety of their retirement income. However, people should not jump the gun and immediately transfer out.
“Final salary schemes offer guaranteed income, normally a substantial amount, from retirement until you die. While, huge transfer values may look tempting, they may not actually be worth it. There can be sensible reasons for transferring, but the decision should not solely be based on the stability of the scheme or the sponsoring firm.
“These schemes are heavily regulated and there is a safety net in place in case of insolvency in the form of The Pension Protection Fund. The PPF is a government-backed scheme which acts as a form of insurance. It pays pensions to existing and former staff if a sponsoring employer becomes insolvent and cannot do so.
“At least 90% of the starting pension you’re entitled to at your normal retirement age is protected by the Pension Protection Fund (subject to an overall cap -which currently provides a maximum compensation of £33,678 a year at age 65). This is a government-backed scheme which acts as a form of insurance.
“There are currently over 6,000 private sector defined benefit schemes in the UK. Around 880 schemes and 235,000 members have transferred to the PPF to date, with total claims on it amounting to around £5.5billion. The Government has predicted that another 600 schemes and around 150,000 members will transfer to the PPF by 2030.
“For those who do transfer out, they need to prepare to manage their pension investments and the risk that comes with that. To avoid that there is the option to purchase an annuity, which will give guaranteed income. However, that’s likely to be considerably more expensive compared to the guaranteed income the final salary scheme offers.
“The decision to transfer or not will depend on your specific situation and so it’s necessary to seek financial advice.”