Final salary pension – stick or twist?
Many people have a “frozen” pension in a Final Salary Pension Scheme, relating to a previous period of employment. This will provide a “guaranteed” amount of pension at the date of leaving that employment. The pension then increases either by inflation or by a fixed rate each year through to retirement, and then increases again each year in retirement.
Guarantees apply only to the extent that the scheme is adequately funded by the Employer, otherwise reductions may apply.
Usually, it will be possible to take a transfer value out of the scheme, into an individual pension plan, in which case the guarantees are lost and you assume the investment risk yourself, which means that your eventual pension could be lower. You would also need to bear in mind that your spouse could be affected in terms of any Widow(er)’s pension that may continue from a final salary scheme after your own death.
For these reasons, most advisory firms will normally caution against taking such a transfer, bearing in mind that you wouldn’t be able to reverse the transfer once completed.
Improved pension transfer values
What has changed in the last few years however, is the substantial increase in the amount of many transfer values. This reflects the general increase in life expectancy and the huge fall in interest rates.
A large transfer value doesn’t automatically mean that a transfer is the right course of action, and it remains the case that most people will still be advised not to transfer, particularly where the final salary pension will constitute the mainstay of a person’s income in retirement.
When transferring a final salary pension might be a good option
There will be situations however where consideration could be given to taking a transfer. There are various scenarios where this might apply, such as:-
- You have other sources of income in retirement, and can more readily accept a degree of investment risk to your pension, in return for increased flexibility, the capacity for income tax mitigation and the preservation of pension fund capital for spouse and children
- You wish to take advantage of the rules allowing you to draw only your tax-free lump sum at retirement, whilst deferring your pension income, so as to manage income tax
- You have other assets to provide income in retirement, and would like to leave your pension fund capital to your family on death (usually free of inheritance tax)
- You suffer from ill-health, and expect that you might not receive full value from your final salary pension, in which case a transfer might be attractive as it creates a capital value that can be passed on after death (inheritance tax issues can apply in this case)
- You run a business, and the transfer value could be used constructively to grow the business
Due to the potential loss of guaranteed retirement income, the Government stipulate that you must take properly-qualified advice before transferring out of a final salary scheme where the transfer value is greater than £30,000. This is essential so that you are aware of the risks involved, particularly investment risks, and all your circumstances are fully taken into account.
If you’d like some independent advice on whether transferring your final salary pension may be suitable for you, email Red Star Wealth Pension Advice or call us on 01253 486346 and we’d pleased to help.