Final Salary Pension Transfers And Tax Free Cash – The Dilemma

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Many workers are attracted to the 25% tax free cash sum available from their pension. Usually it is higher than the tax free cash available from the scheme, often considerably. That in itself is an attraction however the fact that tax free cash can be accessed as a stand-alone benefit is often appealing as is the ability to access benefits at a time of their choosing.

This is not the case with the company scheme, as generally a decision is made at outset (tax free cash and reduced income or income only). There is no flexibility.

Many people think that they have to take all of their tax free cash in one go. This is not the case when they transfer. We always discuss with a client what they will do with the money once they have it in their bank account. Often the motivation is just to have access to the cash as a security blanket.

Once we explain to them they are taking it from a tax free to a taxable environment (tax on interest earned and as part of their estate liable for IHT) they decide not to take it, happy in the knowledge that it will be accessible to them relatively quickly should they need it.

There are many reasons people want to access their cash. To repay existing loans and mortgages, sometimes because they are under pressure to find a solution to a pressing financial problem or simply so that they can be debt free as they approach their retirement.

As previously mentioned some just want to know that they have access to an emergency fund. Other clients want to invest the proceeds in other projects or products; property, businesses, ISA, investment bond etc.

When an adviser sits in front of a client and understands that they genuinely want the security of their cash or want to invest into some other project it is an easier call to make. However DB/Final Salary transfer specialists are often (and easily) criticised by those who do not engage directly with clients. It is an important point to note that if a client took their cash from a DB/FS scheme the question of how it will be spent is not even raised.