Final salary pensions are valuable so why would anyone consider transferring out? Surely it would be financial madness? It is true the regulatory starting point remains a transfer is unsuitable until proven otherwise but for some, with a specific set of personal circumstances, a transfer is an option at least worth consideration.
Below, we outline both the potential final salary pension transfer benefits and risks but first, a reminder of the benefits of a final salary pension. They include:
- A guaranteed income paid monthly in retirement, for life. The income is linked to the pension holder’s salary and years of service not annuity rates.
- The monthly pension income usually increases each year to cover at least some of the impact of inflation.
- Usually a death in service payment and spouses/dependents pension is payable if the pension holder dies before reaching pensionable age.
- Once retired, the rules vary but often pension payments continue (at least in part) to a spouse after the pension holder’s death.
- A full pension is generally payable if early retirement is necessary due to ill health.
- A reduced pension may be available for early retirement. This is usually allowed at age 55 but some schemes have a protected retirement age of 50.
- No decisions are required on the best pension arrangement at retirement. There is no stress associated with managing a pension fund throughout retirement.
The Benefits Of A Final Salary Pension Transfer
For some individuals, there may be advantages in a final salary pension transfer including:
- Transfer values relative to future pension entitlements are higher now than ever before.
- Aside from the arrangements for a spouse and some qualifying dependents (see above) a final salary pension dies with the pension holder. Transferring the value of a final salary pension scheme to a DC scheme enables the pension holder to leave any remaining pension fund to their children after they die. Tax free in some circumstances
- A transfer offers flexibility over how much is withdrawn from a pension fund and when. A final salary pension does not offer this flexibility.
- Transferring gives more flexibility over how a pension is provided to a surviving spouse when the pension holder dies. With a final salary pension, the payment is reduced (if it is payable at all) and controlled by the terms of the scheme.
- Transferring out of a final salary pension scheme and drawing benefits from a personal pension arrangement can be more tax efficient in certain circumstances.
Where There Are Benefits There Are Also Risks
Several market forces are driving increased interest in pension transfers but that does not mean it is the best option for you.There are some major pension transfer risks to consider, they are:
- Once a final salary pension transfer has been actioned, there’s no going back.
- A final salary pension offers a guaranteed pension for life. A transfer to a defined contribution type scheme does not offer this guarantee.
- The transfer value offered by an employer may be low and placing it in alternative investments may not (after inflation) deliver a higher (or equivalent) return to what is on offer from the final salary pension scheme.
- Any investment (including pension investment) is a risk. Investments can fail or deliver less than the original contribution.
- Investments require ongoing management. There is either effort involved if taking a DIY route or costs involved with employing professionals.
Anyone attracted to a secure lifetime income, with very limited risks and with no effort will probably be best to stay with a Final Salary Pension Scheme. Transfering from a final salary pension is not the best option for most people.
It is vitally important to consider all the options available and take professional advice from a suitably qualified (and experienced) financial adviser. It is important to carefully consider both the final salary pension transfer benefits and the significant risks associated with transferring. The length and complexity of the pension transfer process should not be underestimated.
If you would like a general chat through if a final salary pension transfer may be worth considering further complete the form below and we will arrange a time to call you back to discuss. If you have any questions simply open a Chat or call us on 0800 043 8341.
This blog is intended to provide a general review of certain topics and its purpose is to inform but NOT to recommend or support any specific investment or course of action. The past is not a guide to future performance. The value of investments can go down as well as up and you may not get back the full amount you invested. Tax and financial regulations can change. Any figures quoted above are at the date of publication.