Should I transfer my pension or stay with my existing scheme is a question we are increasingly asked. Unfortunately, there is no simple answer as so much depends on personal circumstances but in this post, we have tried to summarise the key issues.
The Benefits Of A Final Salary Pension
For many years final salary pensions have been considered the pension gold standard offering many advantages over defined contribution (money purchase) type workplace based schemes. The benefits of a final salary pension include:
- A guaranteed sum (assuming the sponsoring employer survives) paid monthly in retirement, for life.
- That sum is linked to the pension holder’s salary and years service, not annuity rates that may apply at the point of retirement.
- The monthly pension income is index-linked meaning it increases each year to cover at least some of the impact of inflation.
- Death in service payments are payable if the pension holder dies before reaching pensionable age. Once retired, the rules vary but often pension payments continue (at least in part) to a spouse after the pension holder’s death.
- A full pension is generally payable if retirement is forced early due to ill health.
The Pension Freedoms
Before the pension freedoms, those holding defined contribution type pensions schemes only had one real option at retirement, to purchase an annuity. Although an annuity potentially delivers many similar benefits to a final salary pension each of those benefits comes at a cost.
Based on the size of the pension pot an annuity company pays a set monthly amount in retirement for life. If a payment is required to a spouse after death then the monthly amount on offer will be reduced. If an element of index linking is required the amount on offer will be reduced further and so on. As annuities have offered poor value over recent years the pension freedoms introduced flexi-pension drawdown as an alternative.
A drawdown arrangement delivers control over a pension fund so the pension holder may make their own decisions on investments and withdrawals. Crucially drawdown offers the opportunity to pass on whatever remains in a pension fund to children (or another beneficiary) on death with no inheritance tax. With drawdown, a strategy must be put in place to ensure income does not run out in retirement.
Executing a final salary pension transfer involves exchanging the scheme benefits for a cash value (Transfer value) which is then invested in a defined contribution pension scheme. The transfer allows the pension holder to access the potential benefits of a flexi-pension drawdown arrangement.
The answer to the question should I transfer my pension (or not) comes down to four key factors
- The transfer value.
- Attitude To risk.
- Your confidence in your current scheme.
- Personal circumstances.
The first two factors are closely linked. The higher the transfer value the lower the rate of long- term investment returns required to match the income offered by the final salary pension scheme and therefore the lower the risk. At the time of writing transfer values on many final salary pension schemes are at an all time high.
Assuming there is a high degree of confidence your final salary scheme will be able to meet its long-term commitments then the no risk option is to stay with the final salary pension scheme. Some individuals are comfortable with risk, for others, even a small risk will constantly prey on their minds. Retirement should be a time for winding down and low stress it is therefore important to realistically assess personal attitude to risk before considering a transfer.
Current market conditions have forced many final salary pension schemes into a significant deficit (they are not currently able to meet their long-term commitments). This deficit may be made up by increased payments into the scheme by the sponsoring employer or simply by a change in market conditions and is not a major concern for many schemes. However, some are in real trouble and may be forced into the PPF reducing the pension payments available to those yet to retire. The long term health (or not) a final salary pension scheme is, therefore, an issue to consider.
Personal circumstances are key to the decision-making process. For example for those who are unmarried the advantage of ongoing payments to a spouse after death is not a concern. This potential advantage of a final salary pension scheme, therefore, does not apply.
If you are in poor health or have a life limiting condition then you may wish to take the benefits of your pension earlier (via a transfer) rather than the set monthly amount offered by a final salary scheme that effectively dies with you (or your spouse). A key concern may be to leave a legacy to your children after death in which case a transfer may be worth consideration. You may have other assets and may wish to take the benefits of a final salary pension to deliver flexibility or fund lifestyle choices.
It may be you are divorced and that may influence your decision to transfer (or not) or it may simply be that the transfer value offered makes a transfer a more attractive route financially, when all issues have been carefully considered, than staying with your final salary scheme.
Risk Factors To Consider
Before making any decision it is important to consider the risks associated with a final salary pension transfer that includes:
- Once a final salary pension transfer is actioned, there’s no going back.
- All investments (including pension investment) carry an element of risk.
- Investments will require ongoing management.
- There will be fees associated with the transfer and with (most likely) ongoing management of the investment fund.
Final Salary Pension transfer values can be significant and that, unfortunately, attracts the scammers so it is important to be on your guard. Some scams can be quite sophisticated so it is important to diligently check out your advisers and ask plenty of hard questions. Be particularly careful of anything ‘offshore’ and remember if anything appears to be too good to be true it probably is.
The answer to the should I transfer my pension question is therefore far from straightforward. Mistakes can be costly and it is always best to seek out independent financial advice from those with experience of the transfer process who are able to talk through the issues based on your own personal circumstances.
The information in this article does not constitute financial or other professional advice. You should not take action on the basis of this article without seeking regulated independent financial advice that addresses your specific circumstances. Past performance is no guarantee of future returns. The value of your investment is not guaranteed and you may not get back the full amount invested.