Over the past year we have written extensively on transfer from final salary pension schemes. As recently as early 2015 the advice, in most cases, would be to stay with a final salary pension scheme but many factors underlying that advice have changed. Earlier this month Merryn Somerset Webb (editor of Moneyweek) wrote in the Financial Times “If I had a final salary pension, I’d cash it in”
That said, the choice between a pension transfer (or not) is not straightforward. We therefore thought it useful to simplify the issues, as far as possible, calling up previous posts to deliver the detail.
What Is A Final Salary Pension Transfer
A pension transfer from a final salary (defined benefit) pension means giving up your scheme benefits in return for a cash value which is then invested in another scheme. The other scheme may be a SIPP or some other pension scheme
The Potential Advantages Of A Transfer
In short, transfer from a final salary pension scheme 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 full value of your fund to beneficiaries on your death free of inheritance tax. You can read more on the tax position in our free guide .
Of course you need to balance this flexibility against the benefits of staying with your final salary pension scheme and the risks….Read more
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 quantative 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. The relevance of a high transfer value is discussed in more detail below.
- 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.
The Importance Of The Transfer Value
In basic terms the higher the transfer value the lower the rate of investment returns required to match the benefits offered by the defined benefit scheme and hence the lower the risk. The target should be to leave the capital sum largely intact while living off the investment returns. The capital sum may then be passed on to beneficiaries on the death of the pension holder and their spouse.
Final Salary Pension Transfers – Some Examples
Mrs Y aged 54 approached us in April 2016 for advice in relation to her Electrolux pension scheme. Our initial advice was for her to remain within the scheme and revisit her options on attaining age 55. It recently came to our attention that transfer values from the scheme had increased significantly. We requested a recalculation of her transfer value and found that it had increased by 84%
Miss X contacted us for advice in relation to her GlaxoSmithkline final salary pension scheme. As she had attained age 55 she had applied to her previous employer for an immediate pension. The scheme offered a full pension of £15,018 p.a. or a tax free cash lump sum of £89,140 and a reduced pension of £12,794 p.a. The transfer value offered by the scheme exceeded £550,000 and represented approximately 37 times the income offered by the scheme.
Mr W had worked for Barclays for 25 years leaving service in 2005. He is approaching 55 and wondered what options were open to him and if he could take advantage of the flexible benefits pension regime introduced in April 2015.
Mr W had requested a transfer value from Barclays in May 2016. The transfer value at that time was £750,000. Barclays recalculated the transfer value in August 2016 and it increased to over £870,000 and finally in September Barclays contacted Mr W again with an increased transfer value of approximately £950,000.
The full versions of the above case studies can be found in our final salary pension transfer guide that you may download (free) here
Who Is Best Suited To A Final Salary Pension Scheme Transfer
The historic advice (when transfer values typically ran at 20 times or below) was to stay with the scheme but with transfer values increasing it is worth at least obtaining a cash equivalent transfer value and making some basic calculations. This can be completed at no cost.
A transfer may be particularly attractive to those who are single or in poor health. It can also be of interest to those whose prime objective is to pass wealth down through the generations or when an employers ability to meet their long term commitments to the scheme appear to be in doubt.
A transfer may not be appropriate for those who are significantly risk averse or to those who are completely dependant on the final salary pension income. Generally, a transfer is only suitable for a minority of members of final salary pension schemes.
What is the Final Salary Pension Transfer Process And Costs
To obtain a cash equivalent transfer value and make an initial assessment of the viability of a transfer is a free service offered by many of those advisers qualified and authorised to advise on transfer from final salary pension schemes (contact us on 0800 043 8341 to arrange a no cost assessment).
If an individual wishes to trigger a transfer then a number of costs may apply including
- The cost of advice.
- The cost of setting up a pension scheme to accept the transfer.
- Costs for managing the investment going forward (if required).
Transfer from a final salary pension scheme can take up to twelve months but generally can be actioned in significantly less time. It is important to note that often a transfer cannot be actioned for individuals within 12 months of their normal retirement date.
In the past considering a defined benefit pension transfer may well have been a waste of time and effort, but now for some it is at least worth considering. Download our free guide to learn more, watch our frequently asked question FAQ video series or call 0800 043 8341 for a no obligation discussion on your pension transfer options.