The benefits of membership of a final salary pension scheme are long established so a pension transfer into a different scheme would appear to be financial madness. However, with the changes made to pension rules in April 2015 and the recent dramatic increases in transfer values offered by some pension schemes a final salary pension transfer can be an attractive option for some individuals. Some of the benefits are highlighted below:
- A final salary benefit can be a significant family financial asset. A transfer gives you control of this asset, which can now be passed down through the generations without inheritance tax.
- A pension transfer offers you flexibility over how much you draw from your fund and when.
- Making a transfer gives you more control of the fund to benefit any surviving spouse after your death
- Transferring a final salary pension gives you the flexibility to take more income in your early retirement years.
- To transfer a final salary pension may offer a solution if you have concerns about the long term viability of your final salary pension scheme.
- Drawing benefits from your own personal pension arrangement can be more tax efficient.
But there are also significant risks that must be considered in detail before making any decision to transfer a final salary pension.
Given the complexity and the risks involved it is essential to seek out appropriate Independent Financial Advice to aid your decision making process. Safeguards are already in place with a legal requirement to get properly qualified Financial Advice on a final salary pension transfer when the transfer value is £30,000 or more. Remember a final salary pension delivers guaranteed (assuming the sponsoring employer survives) benefits and you must carefully consider the risks associated with a transfer.
Not all Financial Advisers are qualified to offer advice on a Final Salary Pension Transfer. At The Pension Review Service, we are qualified and authorised to deliver Independent Financial Advice on transfers from final salary pension schemes. We will work with you to understand your needs and individual circumstances and guide you through the process to understand if the option to transfer a final salary pension is right for you. If a pension transfer is appropriate we will be with you every step of the way delivering the professional advice and support you need.
For a no obligation preliminary discussion please complete the form below, set an appropriate time in the comment box and we will call you. We operate U.K wide.
Final Salary Pension Transfer – Frequently Asked Questions
What Is A Pension Transfer?
A pension transfer is made from a final salary (defined benefit) pension scheme to a defined contribution (money purchase) type scheme.
Final salary schemes are workplace based schemes with pension payments, as the name implies, linked to final salary. Defined contribution type schemes may be workplace (where an employer may make a contribution to the pension fund) or personal. Contributions made and investment returns combine to build the value of the fund. A set pension payment at retirement is not guaranteed.
The pension freedoms (2015) delivered a number of potential benefits (see below) but only to those in defined contribution schemes. A transfer entails trading a final salary pension for a cash value. This cash value is then invested into a defined contribution type scheme allowing the pension holder to access the potential benefits of the pension freedoms.
Since 2015 market forces have combined to increase cash transfer values on a number of final salary schemes to an all time high.
Can I Transfer My Pension?
Teachers, NHS employees, Civil Servants, those in the Police and Fire Service and in the Armed Forces are not eligible to transfer out of their final salary pension scheme. This is because these schemes are unfunded (there is no investment pot to draw from) and are paid out of general taxation. There is one exception: if you intend to retire abroad you are entitled to transfer your benefits to a Qualifying Recognised Overseas Pension Fund (QROPS).
In most other cases, it is possible to transfer from a final salary (defined benefit) pension scheme although some schemes have specific rules and regulations which can make the process more challenging and time consuming.
What Are The Pension Transfer Benefits?
A final salary pension delivers a set monthly pension for life. In most cases the payment is index linked to cover at least some of the impact of inflation. Many final salary schemes also offer an ongoing pension to the pension holders spouse on the pension holders death and various other benefits. However, when the pension holder (and their spouse) is deceased the pension dies with them.
A transfer offers the flexibility to take whatever amount the pension holder may decide when they want. It potentially offers tax advantages and (crucially) it offers the opportunity to pass on whatever pension fund remains to beneficiaries (free of inheritance tax) on the pension holders (and their spouses) death.
For various reasons, pension transfer values are at an all time high making a transfer particularly attractive for some individuals. High transfer values may also potentially increase the tax-free sum over that available from the final salary scheme. It is important to note, a pension transfer is not the right approach for everyone and there are risks.
What Are The Pension Transfer Risks?
With final salary pension transfers at a high point the benefits of a final salary pension transfer are at least worth consideration but it is important to fully evaluate the risks, the main ones are:
- Once you’ve made your final salary pension transfer, there’s no going back.
- Placing your transfered fund in a portfolio of investments may not (after inflation) deliver an equivalent (ideally higher) return to what you may have expected if you stayed with your final salary scheme.
- Any investment (including pension investment) is a risk. The value of investments may fall. It is important to consider the potential impact (both long and short term) on retirement if investments do not perform as planned.
- If you do transfer we recommend that your investment is regularly reviewed. You will need to actively manage your fund or pay someone to do so. As you get older managing a fund may be more of a problem.
If you are attracted to a secure lifetime income, with very limited risks and with minimal effort then it may be best to stay with the Final Salary Pension Scheme.
How Safe Are Final Salary Pension Schemes?
In short, very safe. The risk of a final salary pension scheme failing to pay pension benefits is very low as the majority (not all) are backed by the Pension Protection Fund (PPF) lifeboat. That said if a scheme does fall into the PPF and you are yet to retire you should expect a cut in pension benefits.
The Pension Protection Fund (PPF) was set up by the Government to protect the benefits of members. If you are a member of a defined benefit or cash balance scheme and your employer goes out of business leaving the scheme without enough money to pay benefits due, the PPF may pay you compensation.
The British Steel Pension situation may be exceptional (and ongoing) but it does raise the prospect of so called ‘zombie schemes’ without a sponsoring employer. A report from the Pensions Institute in early 2016 suggested up to 1,000 defined benefit pension schemes (final salary schemes) were at ‘serious’ risk of falling into the Pension Protection Fund (PPF).
If a scheme does fall into the PPF existing pensioners can expect benefits to be paid in full while those still to retire can expect 90% of their benefits at retirement. However, for those still to retire it is important to be aware of rules on index linking of future payments and a salary cap.
The purpose of the FAQ section (above) is to provide technical and generic guidance and should not be interpreted as a personal recommendation or advice.