We have said for many years that for most clients retaining their Final Salary Pension Scheme would be considered to be the right thing to do, due to the security of the pension and inflation proofed income for life.
The landscape has significantly changed for two reasons:
1. The recently introduced freedom and flexibility changes from April 2015 could make a transfer to a Personal Pensions from a Final Salary scheme more attractive because:
- you can have greater control over how and when to receive capital and income (tax planning opportunities)
- taxation on death benefits currently more attractive in a personal pension
- the ability to pass down your pension to anyone and not just a financial dependant
2. Due to the financial crisis in 2008 and 2009, the factors which are used to calculate the cash equivalent value of your Final Salary Pension Scheme mean that currently transfer values are much higher than might normally be the case in a normal economic climate.
The decision to transfer from a Final Salary Pension Scheme should not be taken lightly, it’s a complex area of advice which needs careful analysis and understanding of all the risks, but for some clients, depending on personal circumstance the right thing to do could be a transfer.
If it transpires that for your individual needs transferring out of your FSPS is the best solution, it would be advisable to act quickly, as transfer values, which have increased significantly in recent years, may start to fall as the economy enters a new period of growth.
How to decide if your Final Salary Pension Scheme needs to be reviewed and potentially transferred:
- you have other significant pension assets
- your accrued pension is valued above £1 million (as this may be caught by a tax charge from April 2016)
- regular contributions made to your Final Salary Scheme are above the annual allowance limits
- you want control over how your pension assets are invested and how and when the benefits can be paid
- you are single with no financial dependents, as you do not want the pension asset to be lost on death
- you may want or need more lump sum cash than is allowed from the Final Salary pension scheme
- you want to vary your income year on year based on need rather than a pre-determined income, which may be higher than you need
- If you want to retire earlier than the stated retirement age of the Final Salary Pension Scheme, the early retirement reduction applied may be less advantageous than a transfer
- you are in poor health with a reduced life expectancy
- you are not confident that your former employer will keep funding the scheme
- you fear that your former employer may be in financial trouble, as this would lead to your final salary scheme benefit being transferred to the government’s pension protection fund which may not cover all of the benefit you have accrued.
The following case study shows how we helped one client make his decision and highlights some of the potential pitfalls you should be looking out for…
Our client was offered a transfer value of £300,000 by his pension scheme trustees to transfer out of his Final Salary Pension Scheme
Why was a transfer considered?
Because our client was single, with no one financially dependent upon him, we discovered during our review that were he to die before retirement, that only a return of his contributions with interest would be paid to his estate (which amounted to £25,000). In this scenario the Pension Scheme would receive a windfall benefit to the value of £275,000.
Many Final Salary Pension Schemes (FSPS) will require members who are not married to prove financial dependency of any cohabiting partner and where financial dependency cannot be proved, no dependents benefits will be paid.
Moreover, if he were to die early in retirement, his pension income would have ceased, with no income being paid to his estate on death should he be in receipt of his pension for more than 5 years. Again, the pension scheme would be the benefactor.
One solution could be to take out a life assurance policy to cover the capital value of the cash equivalent transfer value or insure the pension income should it only be the death benefit being the main concern.
Our client also wanted to enter semi-retirement by reducing the number of days he worked and to use his pension to supplement his income until his full retirement. His FSPS would not allow him draw his income in a flexible way, as such they offered to pay him a pension but the amount was significantly reduced compared with waiting until his normal retirement age of the scheme.
In this situation, we agreed with our client to forego the valuable indexed pension being proposed in return for transferring to a personal arrangement.
Our client is happy that he is in control of his £300,000 fund and in control of how and when he can access capital and income, he has peace of mind that he can semi retire using only a small proportion of his pension fund now. He can, of course, vary his income year on year which he could not have done with his FSPS and can also leave any unused pension funds to whoever he chooses to in the event of his death, which would be tax free should he die before the age of 75.
The implications for you
Before making a decision, we need to review your current scheme in light of the changing landscape of pension regulation, your current family situation, health, financial goals and your plans for your retirement. The parameters are numerous, and we have seen after detailed analysis and discussions with clients that it is not always the best course of action to retain a Final Salary Pension Scheme.
What is the risk?
There are associated risks to be considered when transferring from a FSPS to a personal pension arrangement, most notably that the pension income you get in retirement will depend on:
- the investments you choose and how well they grow;
- the charges taken out of the plan to pay for the administration and advice; and
- the amount of a retirement income your fund can buy at retirement.
What should I do next?
If any of the points above apply to you, or if you simply would like to understand a little more about your current scheme arrangements and benefits, please contact us on 0161 975 6700 to book your review.