The choice between staying with an existing scheme or making a pension transfer is not straightforward. Both the pros and cons of leaving an existing final salary pension scheme must be considered in detail before making a decision. In this post we consider the potential benefits of a transfer and why those benefits are at an all time high.
WHY CONSIDER A FINAL SALARY PENSION TRANSFER
It may appear that transferring out of a final salary pension scheme would be financial madness and any individual seeking advice on a final salary pension transfer before April 2015 would, in the vast majority of cases, have been advised to stay with their current scheme.
Following the 2015 pension reforms, and with transfer values at an all time high, the situation has changed. For some individuals a final salary pension transfer is now at least worth serious consideration. The advantages of a transfer can include:
1.Transfer values relative to future pension entitlements are higher now than ever before. In some cases they can be forty times (or more) multiple of the initial annual payment offered by the final salary pension scheme. For example those entitled to a final salary pension of £25,000p.a may be offered a transfer value of £1,000,000.
2.The new tax rules (effective April 2015) mean it is now possible to transfer the value of a final salary pension scheme in order to bequeath it to children after you die. The 55% tax rate that applied has been scrapped which means beneficiaries will pay no tax when inheriting the benefits if you die before age 75 and only pay tax at their marginal rate of income tax when withdrawing benefits if you are over 75 when you die.
A final salary benefit can be a significant family financial asset. A final salary pension transfer gives you control of this asset, which can now be passed down through the generations without inheritance tax.
3.A transfer offers you flexibility over how much you draw from your fund and when. It is probable you may wish to draw significantly more in your mid to late 60’s than in your early 80’s. A final salary pension does not offer this flexibility.
4.Your final salary pension scheme will normally continue to pay your surviving spouse if you die while contributing to the scheme or after your retirement date. However, the payment is often reduced (if it is payable at all) and controlled by the terms of the scheme. Making a transfer gives you more control.
5.A transfer out of a final salary pension scheme gives you the flexibility to take more income in your early retirement years, for example, if you are in health, than in later years.
6.If the transferred fund is invested appropriately it may be possible to equal (or even surpass) the benefits offered by the final salary pension scheme while keeping the original capital intact.
7.Transferring out of a final salary pension scheme and drawing benefits from a personal pension arrangement can also be more tax efficient in certain circumstances.
In short, a transfer offers control over how and when you take your pension. It also allows you to take the level of income you require to meet your needs and the option to pass on the remaining pension fund to beneficiaries on your death free of inheritance tax.
There are three main changes that have made transfer from a final salary pension scheme worth considering It is important to remember pension scheme trustees are under no obligation to inform pension holders of movement in transfer values or the potential advantages of a transfer.
- Historical low interest rates have reduced Gilt yields. As Gilt yields fall transfer values tend to rise.
- The impact of Brexit. A further cut in interest rates and quantitative easing have had a further impact on Gilt yields and increased transfer values. The level of that increase in transfer value is at the discretion of the pension scheme trustees but in general transfer values are at an all time high.
- Final salary pension deficits are at an all time high, partially due to historic low interest rates and partially due to Gilt yields (see above). In the worse case this could mean a final salary pension scheme falls into the Pension Protection Fund (PPF) resulting in a 10% cut in pension benefits and a potential benefits cap on future payments. It is often claimed defined benefit pension values are guaranteed, which is true to a point but that guarantee only applies if the sponsoring employer survives to pay out on the pension. The ongoing problems with the BHS and British steel pension schemes have brought the issue into sharp focus and the Government is currently consulting on the best way forward. A transfer from a defined benefit scheme puts you in control.
it is often worth at least obtaining a transfer value (it is free) so you are in a position to at least evaluate your options. It is also important you carefully consider the risks. You can obtain a transfer value by contacting your scheme administrators or, if you prefer, we can help (there is no charge for this service). Simply call us on 0800 043 8341 or email firstname.lastname@example.org.