One of the areas we specialise in is advising on transferring a final salary (defined benefit) pension into a personal pension or SIPP. Wendy's colleague Matthew Harris, a fellow director of the company and pension transfer specialist, helps clients in this area.
Final salary pensions used to be the norm, but are becoming increasingly rare. They are offered by employers to their employees, and guarantee a certain level of pension income for life once you retire, regardless of how long you live. Even better, this income is usually inflation-linked so it will rise each year, and also guarantees a (usually lower) level of guaranteed income for your spouse if you die before him or her.
A guaranteed income for life is a very attractive thing, and for 75% of people will be the best option. However, if you have a final salary pension then you have the option of giving up your right to this income in exchange for a one-off payment into a new personal pension in your name.
Why would you do this? Well, most people shouldn't, but here are some reasons why it makes sense for some people:
- A final salary pension dies with you (or with your spouse) - you cannot leave anything to your children. In contrast, money in a personal pension can be left to whoever you wish - your spouse could inherit it, use some of it, then pass the remainder to your children when they die - all completely free of inheritance tax. As such, if you are worried about how long you might live, or if your main focus is passing assets to your children rather then using them to provide a retirement income, transferring into a personal pension could work for you.
- A final salary pension pays you the same amount each year (increasing with inflation). You have no control over it. However, a personal pension allows you to take whatever income you like from it, and for some people this flexibility is very important. For example, you might want to be able to release large chunks of money in some years, but take nothing in other years. You can do that with a personal pension, but not a defined benefit pension.
- If the employer who promised you the final salary pension goes bust then the pension scheme will be taken over by the Pension Protection Fund. If this happens then you will still get a guaranteed pension, but you might get a lot less than you were promised, and the annual increases with inflation might be lower. As such, if you are seriously worried about the financial health of your previous employer you might want to consider a transfer, especially if you are expecting a large annual pension income (more than £37,000 per year).
- Part of the appeal of a final salary pension is that it promises an income for your spouse if you die (usually 50% of the income you were promised). However, if you are unmarried this isn't of much value to you. Your priority might be to ensure that your children, or someone else, benefits on your death. In this situation transferring benefits to a personal pension could make sense.
- If you are an experienced investor and are willing to take a degree of risk with your pension fund then moving it to a personal pension and investing it could deliver strong investment growth between now and when you reach retirement age.
- Final salary pension schemes will start to pay you an income on your "normal retirement age" (usually 60 or 65). However, you may intend to work beyond this point, and few final salary pensions give you any compensation for delaying the start of your income. Moving your pension money into a personal pension gives you the flexibility to start taking it when you wish, whether that is 65, 70, or never!
If you think that any of the above might apply to you then you might consider asking your pension scheme for a "transfer pack" to see what final salary transfer value they would offer you. You might be surprised how large the figure is. Recent falls in interest rates have seen final salary transfer values soar, by 50% or more in some cases. As such, if you want to do it, there has never been a better time, at least in terms of the amount of money you will be offered.
If your transfer value is greater than £30,000 then you will have to get a qualified IFA to provide advice and certify to your pension scheme that they have done so. Not that many IFAs have the appropriate qualifications to advise in this area, but we do, and can offer the following:
- Step 1: A free initial review of your situation. If we think you might benefit from a final salary pension transfer, we would move to the next stage:
- Step 2: A free detailed, industry-standard Transfer Value Analysis Report, as required by the regulator, to help you and us understand the real value of the benefits you are giving up.
- Step 3: If we agree that you should transfer we will select a provider to receive your pension fund, set up a personal pension (or SIPP) with them, and select an appropriate investment strategy for you. We will explain all the fees involved first, before you commit to anything.
- Step 4: Once the transfer is complete we will manage your new personal pension on an ongoing basis, ensuring that the investments remain suitable for you.
- Step 5 (optional): If you wish to take over management of the investments yourself at any point in future this is no problem and there are no penalty charges for this. We believe that our portfolio management service offers a low cost, stress free, investment experience, and our clients are very happy with the performance we have delivered for them, but we know that some clients will wish to select their own investments.
To discuss our service please get in touch.
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