The amount of money offered when you move your benefits from your final salary pension is known as the transfer value. This value is higher when the yields on government bonds (gilts) and UK interest rates are lower.
If and when gilt yields and interest rates start to rise again, transfer values will fall.
This is because it costs your pension scheme more to pay you a fixed amount of money when interest rates and gilt yields are low.
Clearly, if you are going to give up a guaranteed income you need to get as much money in exchange for it as possible. Current values offer a pretty attractive swap and won’t last forever.
Another reason to think about transfer from a final salary pension scheme is because pension rules are changing. In the 2014 Budget, chancellor George Osborne introduced new, more flexible rules about how you could draw an income from your pension, effectively allowing you to take as much out of your pension pot as you want, when you want (subject to your marginal rate of income tax). Further information about the “inheritability” of Pension funds was announced in the Autumn statement These rules come into effect after April 2015 (to find out what the new rules mean for your retirement click here).
The new rules are much more flexible than the previous system and will give retirees many more options. The government recognises that these rule changes make transfer from a final pension scheme more attractive, and they have threatened to consider banning transfers in future if they are seen as having a destabilising effect on pension schemes and the economy.
Who is likely to benefit from a final salary transfer?
To consider a transfer, you must understand and be comfortable with the extra responsibilities and risks. You are switching a fixed income that gets paid to you without you making any effort, to an invested pot of money that needs managing, carries risks, and requires some on-going effort to maintain.
Such a pension pot gives you a very different ‘shape’ of benefits from a guaranteed lifetime income. For example, you might choose to take more benefits earlier in your retirement, when you may be better able to enjoy them, at the expense of income later in life. This is one of the more common reasons for wanting to transfer from final salary schemes, but it should of course always be combined with a plan for long-term financial security.
In order to move your benefits from a final salary scheme, it’s best if you have a big enough transfer value to be able to withstand a degree of risk to future income. Alternatively, you may have other income-generating investments that provide a buffer and enable to take on that additional risk.
How do I find out about my transfer and decide what to do?
Transfer values only apply to those who have left, or are about to leave a scheme and have yet to draw their pension. You can’t transfer out once you are in receipt of a pension.
To get your transfer value you need to contact your old employer’s pension scheme administrators. They generally take four to six weeks to get back to you with a figure, but may take longer. You are entitled to receive one free transfer value each year (sometimes more depending on your scheme).
The transfer value offered to you will usually be valid for three months, giving you time to decide what to do.
The decision to take a transfer value is both complex and irreversible, so it’s important to take advice from an appropriately qualified adviser. Advisers require special permissions from the Financial Conduct Authority (FCA) to advise on final salary transfers, so not all advisers will be able to help you.
What advice do I need?
You need to fully understand the benefits you will leave behind and those open to you from a personal pension account so that you can decide what suits you best. This will include thinking about spouses/civil partner’s benefits, if you are single or unmarried, cash options, income options, early and late retirement options and the New Proposed Flexible Retirement Rules. You also need to see whether the transfer value is attractive relative to what you give up. A simple measure of this is known as the ‘critical yield’. This illustrates the amount of investment return required each year from any new arrangement to match the benefits you are giving up at the Normal Retirement Date (NRD) of your scheme.
You need to understand all the risks implicit in both options.
Above all you need to plan what you will do with the transfer value if you take it. This includes choosing a personal pension provider, deciding when to make withdrawals of cash and income and selecting investments for your pension account (or appointing an investment manager to do this for you).
If you would like to speak to us directly about deciding what best suits you, you can request a call back by completing the form below.