Final salary or defined benefit pension schemes are often referred to as ‘guaranteed’ or ‘gold plated’ because they provide a defined income from the date of retirement until the person dies. Most also allow a tax-free lump sum at retirement and some schemes have death benefits for spouses/common law partners too.
These pensions have been amongst the best savings vehicles over the years and the fact that almost all have now closed their doors to new members is seen as the end of a golden age for pensions.
Long-term interest rates affect schemes’ ability to meet their obligations and current low interest rates now mean many are underfunded, having more liabilities than they have assets. Accordingly, we’ve seen schemes offering larger sums for people to transfer out than we have in the past. However, as interest rates rise those sums are likely to be reduced.
At the same time, the Pension Freedoms rules, which came in from April 2015, made the prospect of a transfer out of these schemes potentially attractive, as it can bring a person’s pension pot under their control and also offer flexibilities such as accessing the pension cash or leaving it to loved ones and/or other beneficiaries. This is outside of inheritance tax, with larger pots potentially being cascaded down between generations.
There has been interest from non-active members of schemes, who hold deferred pensions, to transfer out in order to benefit from the Pension Freedoms rules – for example, where they are over 55 and may have more than one pension and would like to access the cash from one, while keeping other pension(s) and assets to fund their retirement.
Here are 5 key points to consider if you are thinking about transferring out of a final salary pension scheme.
- Final salary pension schemes come with benefits guaranteed. That means receiving a known amount of income (some schemes include inflation rises) for life. Is that income ‘peace of mind’ something you are prepared to give up?
- Most final salary schemes include a transfer of benefits to a widowed spouse or common law partner, but usually at 50% of the full income payment. Typically, this does not extend to other family and beneficiaries. After a transfer, a spouse or partner could make withdrawals from the full pension amount.
- Giving up the guaranteed benefits of a final salary scheme and switching to a self-invested personal pension under your control, means you will be relying on an investment strategy to deliver your income. An Independent Financial Adviser can help you manage this as there are investment risks involved. The value of the fund is not guaranteed and could go up and down. The income provided for the fund could be higher or lower than you would have received under the final salary scheme.
- The transfer amounts being offered can seem exceptional now but outside of a final salary pension scheme, factors such as longevity (people typically underestimate how long they will live) and calculating how long the money needs to last, should be considered
- Accessing pension cash to spend now can leave people short of money in later life, particularly for things like long term care, so careful consideration of the options is required.
By law, anyone with a transfer value over £30,000 must obtain the advice of a regulated financial adviser who will compare the benefits. This is to ensure you are aware of the facts about transferring and can make an informed decision.
As Chartered Financial Planners and Independent Financial Advisers, Lowes have had many people seek our advice on whether a transfer would be the right choice for them.
Our Consultants walk everyone through a series of questions to assess whether a transfer is in your best interests. We then compare the benefits of the final salary scheme against the benefits of a transfer. Every transfer decision will depend upon personal circumstances. If we believe a transfer is not right for you, we will tell you so and will not facilitate it. If we consider that it may be worthwhile pursuing, we can help you through the process.
Assessing the positives and negatives of transferring out of a final salary pension is a complex process and any decision should not be taken lightly. So, having advice that is focussed on the right outcome for you is crucial.