Pensions
Final Salary Pension Transfers
Given the choice of £1.5 million now or £44,000 for life, what would you choose?
Since April 2015 Mercer has estimated that £50 billion has been transferred out of final salary pension schemes by 210,000 members. Historically high Cash Equivalent Transfer Values (CETV), mainly due to low interest rates and gilt yields, and the introduction of pension freedoms means the temptation to transfer has arguably never been greater.
These cash sums can be used in two main ways, for those who are still saving for their retirement the cash sum can be transferred into a personal pension plan where it is invested. Or, for those who want to start living off the proceeds of their pension it can be transferred into a drawdown pension, where the money is invested and some is taken out as regular income and/or a lump sum.
However, it is a decision that should not to be taken lightly. Whilst many people like the idea of immediate wealth and having a large sum instantly in their control, the result of wishing to transfer is sacrificing a guaranteed, often inflation proofed, safeguarded income for life.
Five considerations to transfer
1. Flexibility
Whilst final salary pensions can be very valuable and attractive, they can also be inflexible, whereas if you transfer it then you can take as much or as little of your pension as and when you require it.
2. Potential for access to more tax-free cash
You can then take one quarter of your pension as a tax free lump sum and this is likely to be a larger figure after transferring out of your final salary scheme.
3. Succession tax planning
A final salary pension will provide a survivor’s pension to your widow when you die, subsequently after the widower dies the pension ends. But if you transfer out of your pension then you can nominate anyone to receive your pension upon your demise, and if you die prior to reaching age 75 this will be paid tax free.
4. Health
If you think you might be one of those whose life expectancy is below average then you might consider transferring it out, as the value offered should reflect average life expectancy and this may be a bigger amount of money than the amount it would have cost the scheme to pay your pension if you did not transfer and died relatively young.
5. Concerns about the solvency of the sponsoring employer
If the employer who sponsors your final salary pension is at risk of becoming insolvent, then there is a chance that you might not get all of the pension you were expecting, but if you transfer out then your pension pot is unaffected by what subsequently happens to your ex-employer’s business.
Five Reasons not to transfer
1. Certainty
One great advantage of having a final salary pension is that it lasts as long as you do, if you happen to live longer than average, then it is the scheme that has to find the money to fund this. By contrast, if you transfer your pension you are taking on the uncertainty about how long you will live.
2. Inflation
Your final salary pension will have some form of protection against inflation, the extent of which will depend on the rules of the scheme and when you were a member. Once you transfer the pension the inflation risk falls solely on you.
3. Investment Risk
In a final salary pension scheme the value of investments going up and down makes no difference to the amount of pension you receive, the employer has to bear the investment risk. By contrast, if you transfer the pension and invest it and the funds perform badly you may have to live on a reduced income.
4. Provision for Survivors
Since 1997 it has been a legal duty for final salary pensions to provide a pension for a surviving spouse if a scheme member dies after reaching retirement age. The CETV you receive if you were to transfer out may not reflect the full cost of the survivor benefits offered.
5. Pension Protection Fund
Should your ex-employer become insolvent the Pension Protection Fund (PPF) will pay 90% of the pension accrued. The compensation is subject to a current overall annual cap of £33,678.38 at age 65 after the 90% has been applied. During deferment and once in retirement your pension will increase with inflation and there will also be compensation for certain survivors. But, if you were to transfer out then you will no longer be protected by the PPF.
Final salary pensions can be extremely complex and it is imperative to take sound independent financial advice before considering a pension transfer. Please contact us if this has raised any questions, or if you wish to discuss your options. Email: info@plutuswealth.com
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