danielashby

Should you stop pension contributions if you're approaching the Lifetime Allowance?

If you've been saving into a pension during your working life, you might be closer to the Lifetime Allowance than you think. Going over the threshold could mean facing tax charges on future income and, as a result, some are opting to leave their schemes. But is that the best option?

What is the Lifetime Allowance?

Currently set at £1.03 million, the Lifetime Allowance is the total amount you can save into a pension over your life. It can seem far-off, but when you consider we may pay into a pension over four decades, along with employer contributions, tax relief and potential investment returns, the value of your pension can be more than expected.

What happens if you exceed the Lifetime Allowance?

Legally you can exceed the Lifetime Allowance. But this means paying additional tax. If, when you start taking your pension, the value exceeds the Lifetime Allowance, the excess benefits will be subject to:

• 55% tax if the pension is taken as a lump sum
• 25% if withdrawn as an income

With this in mind, it's easy to see why some are choosing to retire early, reduce hours or opt out of a pension scheme entirely.

It's a trend that's particularly evident among high earners and those with Final Salary pension schemes, which typically offer greater benefits than alternatives. It's a penalty that's affecting doctors, but it's also an issue for other earners.

To calculate a Final Salary scheme in your Lifetime Allowance you must multiply the expected annual income by 20. If, on the other hand, you transfer out of the scheme, the Cash Equivalent Transfer value may be quite high and contribute towards a large proportion of your allowance.

Even if you're approaching the Lifetime Allowance, there are two key reasons to continue paying into your pension:

1. Employer contributions: If you leave your employer's pension scheme, they will stop paying in too. This could end up costing you money overall. While the tax implications may be less tax-efficient once you breach the Lifetime Allowance, it doesn't necessarily mean all the benefit is lost. Where your employer is contributing at high levels, it may be the case that this offsets the additional tax you pay, and you still end up with more than you put in.

2. Auxiliary benefits: Before considering leaving your pension scheme, look at the additional benefits on offer. Some pensions offer auxiliary benefits that may be valuable to you; leaving the scheme typically means forfeiting these. One of the most common auxiliary benefits is a pension for your spouse, civil partner or dependents. It provides financial security for your loved ones should you pass away first, it will usually pay out a percentage of your pension or salary.

While avoiding paying unnecessary tax on your savings makes sense, it needs a balanced approach. Weighing up how the decision can impact financial security, as well as your family's, now and when you reach retirement is important. In some cases, paying more tax could prove beneficial when you look at the bigger picture.

Options if you leave your pension scheme

While it's not the right option for all, for some leaving a pension scheme may make sense. If you progress this option, it's crucial to have a plan for the future. There are other tax-efficient ways to save for your future, such as Cash and Stocks and Shares ISAs (Individual Savings Account).

If you'd like to discuss retirement provisions and tax liabilities and their impact on your wealth, please contact us. We can help you understand if leaving your employer's pension scheme is the right thing to do in your situation.

Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.

by danielashby

Brexit and the property market: What does it mean for you?

The Brexit debate is still raging. While predictions are being made about the likely outcome, more uncertainty seems to be the only constant. For those looking to buy a home or move house, what does it all mean?

The official date when Britain is set to leave the European Union is now just weeks away on 29^th March 2019.

House prices did fall following the referendum. But despite the doom and gloom predictions prices have remained relatively steady since across the UK as a whole. Prices haven't increased at a pace seen in the past but, for the most part, homeowners haven't seen significant drops in value either.

House prices in June 2016, when the referendum occurred, was up 8.17% compared to the previous year. A year later, in June 2017, this had fallen by 4.13% and dipped further in June 2018 to 3.03%. This meant that in 2006 the average UK house price was £212,887. Two years later, it was £228,760. The modest increase was not the catastrophe that some predicted.

However, signalling the lack of confidence in the market, the number of house sales has fallen this year. According to research conducted by Project Etopia, six in ten regions in England and Wales saw sales fall in the first half of 2018. The average decrease in sales was 4.9%.

What will happen to property prices?

There's no certain answer, not least because we don't know which direction Brexit will take. Even if we knew, calculating the full impact would be challenging as effects of any deal will depend on many factors.

Mark Carney, Governor of The Bank of England, previously warned that a no-deal Brexit could see house prices tumble. Under the worst-case scenario, prices could fall by a third over a three-year period. For prospective first-time buyer or planning to move, this is daunting, who don't want to purchase a home only to see the value eroded.

While some prospective buyers and movers are choosing to wait and see, you don't have to. There are steps you can take to improve your financial security despite a looming Brexit.

1. Consider interest rates

Since the recession, interest rates have remained low. Even following two recent rate rises, the Bank of England base rate sits at 0.75%. Good news for those with a mortgage, as repayments have been low as a result.

As with all things Brexit, opinions are divided. Some believe interest rates will remain some say they will rise following the deal. With this in mind, it may be wise not to stretch budgets too far. Quick calculations can highlight whether you can comfortably afford to pay your mortgage, if interest rates were to rise by 5% and give you peace of mind. With surplus income, it also gives you an opportunity to overpay your mortgage, taking advantage of the current low interest rates.

2. Use a bigger deposit

One of the biggest worries about buying a home before a potential downturn (post Brexit), is the prospective of negative equity, where the value of your home is less than the amount left on your mortgage. It can make it impossible to move and many would have to use savings to do so. Most lenders also won't let people with negative equity switch to a new deal when their current one ends and this can mean paying higher interest rates.

Often, this is more of a concern for first-time buyers, as they'll own less equity to begin with. Using other savings to boost your deposit where possible can help to reduce the risk of this happening.

3. Regard a home purchase as a long-term investment

Following Brexit, some experts expect house prices to dip. However, looking at the bigger picture, it's likely that they'll recover in the long-term. Purchasing a property with the view that's it's a home and long-term investment means there's less worry if the market experiences some short-term volatility. Over a period of five to ten years, it's probable that any market downturn will correct. If you don't sell during a low period, you won't make a loss. That said, if you do sell then the property you purchase may have also reduced in value.

If you're looking to purchase a home that you only plan to own for short period of time, it may be worthwhile waiting to see what Brexit will bring in the coming months.

If you'd like to discuss your finances in the context of Brexit, please contact us. We'll help you understand how the uncertainty and subsequent deal could affect you and your plans.

by danielashby

How to protect your pension income during volatility

Pensioners are taking advantage of the Pension Freedoms. Introduced in 2015, the changes offered more flexibility in how people can take an income in retirement, but at the same time gave pensioners more responsibilities too.

For retirees that have chosen to leave some, or, all of their pension invested, protecting its value and the income it provides is important. Here, we outline some of the options and considerations.

Flexi-Access Drawdown, as it is called, allows pensioners to leave some or all their pension invested, rather than purchasing an Annuity that provides a guaranteed income. It's an attractive option for two key reasons:

• Firstly, it allows pensioners to withdraw flexible amounts of money when it suits them. As lifestyles and aspirations change in retirement, this can be beneficial.
• Secondly, as the money remains invested, it has an opportunity to continue growing. With retirement now lasting longer, it's a useful way to potentially boost pension income.

But how can remaining invested during retirement affect your income, and why might you need to protect it?

As with all investments, there's a chance it decreases in value. Should you decide to make a withdrawal at a low point, you would need to sell a larger percentage of your pension fund to receive the same level of income. This means that your savings are used more quickly which reduces future growth too. This is known as pound-cost-ravaging.

As a result, it's recommended that retirees take a lower level of income when their investments are underperforming. However, it's a step that many fail to take. According to research from Zurich:

• 36% of people keeping their pension invested through retirement do not have a cash safety net to fall back on, meaning they could be hit if markets fall
• Among the 64% that are holding cash in reserve, fewer than one in ten would think to use it if there was a significant drop in the stock market
• 49% of people taking an income in drawdown said they would continue to withdraw the same amount in the event of a market correction; just 12% would scale back withdrawals

Alistair Wilson, Zurich's Head of Retail Platform Strategy, recently said in the news: A staggering number of retirees appear to be in the dark over how to protect their pensions if stock markets tumble. Withdrawing the same level of income in a downturn could take a bigger bite out of your pension fund - yet it's a trap that's easily avoided.

What steps can you take to protect your pension?

1. Hold a cash reserve

Holding some of your savings in a cash reserve gives you the means to ride out bumps in the market. If investment values fall, using your cash assets, rather than withdrawing from your pension, can help protect value.

How much you should hold as a reserve depends on your personal circumstances, including living expenses. Many retirees are taking the necessary action but the research suggests a high portion will be reluctant to use their cash even though it could improve value and wealth in the long term.

2. Understand what withdrawal rate is sustainable

Understanding how much you can afford to withdraw from your pension over time is a critical step before you proceed with Flexi-Access Drawdown. When you choose this route, you're responsible for ensuring that your pension will continue to support you throughout your life.

Again, a sustainable level will depend on your personal circumstances. But an annual withdrawal rate of around 3% can be a benchmark for some. If the value of investments falls, so too will the withdrawal amount.

3. Regularly review investment performance

If your pension does remain invested in retirement, an active role in monitoring its performance is key, as this will impact on your income. While monitoring pension performance, it's important to remember that short-term market volatility is normal. Don't panic if you see that your pension has decreased in value but do have a plan in place for when it happens.

4. Take action when needed

Reviews alone aren't enough. If investment values fall, scaling back the amount you're withdrawing or even stopping can help preserve the value of your pension in the long term. Having assets you can fall back on is very useful. This is where a cash reserve can provide security should a downturn occur.

If your investments are too volatile, you may benefit from diversifying or reducing the level of investment risk you're taking.

5. Seek professional advice

Working with a financial planner can help create a tailor-made retirement plan that works for you. Bringing together your aspirations with your pension savings. By working with a professional, you can be confident in the decisions and how potential investment downturns will affect your income.

If you're using a Flexi-Access Drawdown product or are considering doing so, please contact us. We'll help you understand how market volatility could affect your income in the short, medium and long term, and the steps to take to safeguard your retirement aspirations.

Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Your pension income could also be affected by the interest rates at the time you take your benefits. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

by danielashby

Three things to know about sustainable investment

Do you plan to grow your investment portfolio this year? Will ethics factor into the decision? More investors are choosing to invest sustainably and ethically but doing so can seem complex. Before you start moving your money there are three key points to consider.

Sustainable investment has grown in popularity. It's about not only investing your money with companies that think and operate in a sustainable way, as well as thinking about profit.

Different people call the practice by different names. Some we've seen include: responsible investing, impact investing and ethical investing. Whilst each have slightly different meanings, when you dig deeper, their collective aim is to invest in a way that seeks to have a positive influence.

As more people become aware, ethical bank Triodos predicts the market will see a significant boost in the next few years. Research shows that more than half of investors want their money to support companies who make a positive contribution to communities, to society and to countries on a global scale. The UK market is expected to grow by 173%, reaching £48 billion, by 2027.

All investment decisions need careful research and planning to ensure they are right for you. When investing with an additional factor in mind, it can add to the work. Here are three areas to think about first.

1. Sustainable investment can cover Environmental, Social and Governance (ESG) concerns

Sustainable, ethical, responsible; they're broad terms that can mean different things to different investors.

ESG criteria covers numerous different concerns, from the impact fossil fuels have on the environment to executive compensation. Sustainable funds have their own criteria when setting out where they'll invest your money.

Sustainable investing can be being quite subjective. What you may deem as a sustainable stock, another investor may decide is unethical. Take pharmaceuticals, one person may decide it's unethical due to animal testing, while another will argue it contributes to the development of society.

This can throw up some difficulties. So, you need to think about your top priorities. The Triodos research highlighted the areas that investors are most likely to avoid:

• Manufacturing or selling of arms and weapons (38%)
• Worker/supply chain exploitation (37%)
• Environmental negligence (36%)
• Tobacco (30%)
• Gambling (29%)

With ESG covering different concerns and sustainability being subjective, it can be challenging to know where to invest. The good news is, that as more firms operate in this space and more investors choose to invest in this way, the options are growing.

2. There are different strategies

With sustainable investment priorities, there are different approaches you can use to make sustainability part of your focus and your investment.

• Do you want to actively avoid companies that operate in sectors deemed unethical?
• Or would you prefer to invest in firms that are at the forefront of making sustainable changes?

Much like any investment portfolio, a sustainable investment needs to reflect your objectives. This should combine your aspirations and your financial situation, such as your investment risk tolerance and portfolio size.

When factoring in your personal sustainability goals, there are three main ways:

• The first is known as negative screening. This is where you avoid investing in certain industries or companies because their practices don't align with your ethical stance.
• In contrast, positive screening would see you investing in companies that are working to improve the concerns you have.
• Finally, engagement is where you use your shareholder power to exact change within companies.

As the latter strategy requires you to hold a significant amount of power, it's an option that's more commonly used by institutional investors, rather than individuals.

3. Sustainable investing doesn't mean lower returns

Even when sustainability is a consideration, the returns you make from your investments are still important. It's a common belief that investing with other factors in mind leads to lower returns. However, there is research that suggests this isn't always the case.

Research published by the University of Oxford and Arabesque Asset Management in 2015, concluded that 88% of reviewed companies with robust sustainability practices demonstrate better operational performance. This ultimately translated into improved cashflow, which benefits investors.

Advocates of sustainable investments suggest that these over the long-term, may outperform alternatives as they consider more risk factors. While investment performance can't be guaranteed, the research indicates that sustainability and profitability aren't incompatible.

Research also suggests that ethical investing can be just as profitable. But there are some key things to keep in mind. First, all investments come with a level of risk and there is a chance that the value of your investments will decrease.

Second, comparing past performances of funds and stocks doesn't give you a reliable indicator of how they'll perform in the future and finally, sustainable investment is still a developing market.

If you'd like to discuss investing, including what sustainable investment means to you and how to incorporate it into your financial plan, please contact us.

Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

by danielashby

Pension cold calling ban: What does it mean for scams?

The long-awaited ban on pension cold calling came into effect on the 9^th January 2019. In a bid to protect pensioners being targeted by fraudsters, the ban has now been approved into law. It's a move that should help the Financial Conduct Authority (FCA) and other organisations reduce pension fraud.

Previous figures released by the FCA and The Pensions Regulator (TPR) have shown how devastating pension scams can be. On average, victims lost £91,000 in 2017. It's a significant sum that could have a long-lasting effect on retirement plans, as well as causing stress.

Pensioners and those approaching retirement are often targeted by scammers through unsolicited contact. In fact, Citizens Advice previously suggested 97% of scam cases about pension unlocking services stemmed from cold calls.

To entice pension savers, scammers will offer 'a free pension review', to unlock a pension early or suggest investments that are 'high return, low risk', such are a red flag. However, a poll found almost a third of those aged 45 to 65 wouldn't know how to check if they're speaking to a legitimate pension adviser or provider and 12% would trust an offer of a 'free pension review'.

Highlighting the scale of the problem, TPR has revealed it's investigating six people for pension fraud. Estimates show around 370 people in the UK have been persuaded to transfer around £18 million to fraudsters.

An attractive target for criminals

It's easy to see why criminals are targeting pensions. Pensions can be complex and some savers have been duped into giving away their pension or personal details. On top of this, a pension is often one of the largest sums of money people have saved over their working life, and many don't regularly check it. As a result, many pension scams go unreported.

The growing levels of fraud and personal losses has led to action and for pension cold calling to be banned. So, what does this mean for you?

Firstly, it offers you more protection. If you get a cold call from someone wanting to talk about your pension, you should hang up. Reputable providers and advisers that you want to work with will not use this form of contact.

But that doesn't mean you should let your guard down. A ban on cold calling doesn't mean fraudsters will stop. Giving pension holders the confidence to step back from unsolicited contact is crucial. But it's not just about cold calls. There are some loopholes criminals will try to exploit. One is to pose as genuine advisers and providers, including:

1. Calling from abroad: The cold calling ban only applies to UK phone numbers. As a result, fraudsters, may call from abroad, allowing them to work around the ban.

Six steps to prevent pension scams

The risk of being targeted by scammers is still very real. These six steps can help you reduce the risk and protect your pension.

1. Understand your pension: The more you understand about your pension, the better you can safeguard it. For instance, scammers may suggest they can help you access your pension before the age of 55. However, this is only possible in very rare circumstances and should be done by contacting your pension provider directly.

2. Don't make any quick decisions: Pension decisions can affect your income and financial security for the rest of your life. As a result, you should take your time. Reputable professionals will understand this, while criminals will try to pressure you into making a snap decision.

3. Be cautious of all unsolicited contact: While the cold calling ban does offer protection, you may still be targeted by unsolicited contact. Be cautious when responding to any type of communication you're not expecting.

4. Check the authenticity of who you're speaking to: The FCA Register offers a simple, effective way to check if you're speaking to a regulated person or company. Be aware that criminals may use the genuine details of an adviser or firm. To talk to a professional, call directly using the details listed on the register.

5. Ask questions: Scammers rely on you taking them at their word. Asking questions can help you uncover untruths. From investment risk to legislation, genuine providers will be happy to answer your questions, understanding that any pension decision is a big one.

6. Be realistic: The golden rule 'if it sounds too good to be true, it probably is', applies to pensions. There's no simple way to significantly boost your pension savings or access it early. If there were, more people would be doing it.

If you'd like to discuss your pension, whether you think you've been targeted by scammers or not, please get in touch. We're here to help you understand what your pension options are.

Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

by danielashby

How does cashflow modelling help you?

Financial planning can be filled with jargon and difficult to understand how it helps or the value it adds to your plans. Despite the confusion, one of the valuable tools we use is cashflow modelling. It's a strategy that offers plenty of benefits to clients, as well as building some useful clarity around the areas which can tend to confuse people.

In simple terms, cashflow modelling is the process of assessing your current wealth and, from this, forecasting how it will change. It takes into account both income and expenditure, helping to make clear how your finances may change in the future.

It sounds simple but there's a lot that feeds into the process and the more information that's used, the better the results. You should include areas, such as property wealth, investments values, fixed income and debts. Once done, you go on to calculate how your wealth will be impacted by factors like growth, inflation and interest rates over the years.

As you can imagine, this can get complicated. An effective cashflow modelling does all these calculations behind the scenes, giving you a visual representation of the information.

But how does this add value to you? Here are just seven ways it can help you be financially organised and help achieve your aspirations.

1. Project your lifetime wealth

Cashflow modelling can give you an idea of how your wealth will change over your lifetime. It can help you see which products are best for maximising your savings with your goals in mind, for instance. It can help make your aspirations seem more tangible and demonstrate how the steps you're taking will have an impact over the longer term.

2. Analyse how money is spent

It's a process that can also help you keep track of where your money is going too. If you want to increase your savings, it can give you an indication of where you're able to cut back and what difference it will make. Having a visual representation of where your money is going can help you understand if your finances are in line with your priorities.

3. Insight into retirement savings and planning

When you start saving for retirement it's likely to be decades away. As a result, workers are often unsure of how much they have saved or, if it's enough for their retirement plans. Using a cashflow modelling tool means you can see how your pension savings are projected to grow over the years and the level of income it can provide once you've given up work.

4. Demonstrate the effects of varying inflation and investment returns

Inflation and returns will have an impact on your wealth. With these two important factors varying over time, it can be difficult to assess the full effect of them. By adjusting the levels of interest or return when cashflow modelling, you can start to create a picture of the different results of varying scenarios. This can be particularly useful for investments and weighing up risk with potential returns.

5. Provide a visual representation of your goals

Saving or investing with long-term goals in mind can be challenging. The small steps you take regularly towards them can seem insignificant. Cashflow modelling can give you a visual representation of how you're progressing towards objectives. It can help them seem more tangible and give meaning to your efforts, knowing they are setting you on the right path.

6. See how life events could have an impact

Throughout life, there will be events that affect your assets. Cashflow modelling can consider these and demonstrate how they will affect your estate. For example, it can show you how receiving an inheritance, downsizing your home, or losing your partner's pension should they die before you will impact on your wealth and lifestyle. You can't always predict what will happen but cashflow modelling can help you prepare.

7. Plan your legacy

It's difficult to plan your legacy without knowing exactly how much your assets are likely to be worth when you pass away. Cashflow modelling can give you a projection of your estate at different points of your life, allowing you to plan more effectively. You can also see how other decisions, such as needing long-term care, would have on the inheritance you leave behind for loved ones.

The importance of keeping cashflow modelling data up to date

To reap the full benefits of cashflow modelling, it's imperative that the date used is kept up to date. The forecasts is only as good as the information it is based on. Working from previous cashflow models could mean your decisions are based on inaccurate assumptions and projections.

To get the best results from cashflow modelling, you should provide an accurate, recent picture of your wealth. In addition, it should reflect current wider influences, such as interest rates and stock market performance. Therefore, keeping the information the process uses fresh is vital.

If you're interested to learn how cashflow modelling can help you, please get in touch.

by danielashby

Seven signs that your investment portfolio could benefit from a review

When did you last reviewed your investment portfolio? It can seem like a daunting task and one that's easily forgotten. But it's an important question and one that needs to be addressed to ensure your investments are on track and aligned with your personal goals.

If these seven signs are familiar to you, it may be time to arrange an investment review.

1. You can't remember the last time you reviewed your investment portfolio

While you don't want to constantly monitor your investments and worry about temporary market fluctuations, your portfolio shouldn't be something you never look at either. If you can't remember the last time you reviewed your investments, it's a sign that it's probably been too long.

It's advisable to undertake an investment review on an annual basis at least, aligning with other financial planning steps that you take. A yearly timeframe gives you an opportunity to look at the long-term trajectory of your investments and still take action when necessary, to minimise negative influences.

2. Your investment objectives aren't clear

Your investments should reflect your wider goals in life. Do you want to grow a nest egg to retire comfortably in 20 years' time? Or are you saving for your child's education and need access to the money in five years? Your objectives will have a big impact on how the money is invested and the level of risk you may be comfortable taking.

Reviewing your portfolio is the perfect time to think about what your objectives are and clearly define how your investments will need support these.

3. Your financial situation has changed

Over the years your financial situation will undoubtedly change. Your investment strategy should too. Receiving an inheritance, for instance, may mean you can grow the overall size of your portfolio more quickly. While an increase in salary could mean you're willing to take on more risk with a portion of your investments. Alternatively, having retired, you may start to withdraw some of your investment to use as income and reduce the level of risk you are subject to.

Your financial situation has a direct impact on how your investment portfolio should be structured.

4. You've experienced a big life event

Life events will have an impact on how you view finances and investments. If, since your last portfolio review you've started a family, married, divorced, or retired, it's important to look at how the event may have change the best approach for you.

Life events can influence our outlook on life and, therefore, money. It's natural that this will affect your investment too. If your priorities have changed, it's a good idea to see how your investment strategy continues to support them.

5. You have no idea how your investments have performed over the last year

It's important not to get caught up in the short-term volatility that investment markets experience. It's natural for the value of your investments to rise and fall over time. However, that being said, you should have a reasonable idea of how your investments have performed, allowing you to adjust where necessary.

Committing to a regular review of your investment portfolio means you're aware of potential opportunities and risks and any steps you need to take as a result. It's a process that can help maximise the value of your investments with your goals in mind.

6. You haven't considered changes that are out of your control

While your personal circumstances and goals should be at the centre of your investment portfolio, wider changes also need to be considered. How different economies perform will influence your investment value too, as well as other factors that are out of your control. While difficult, it's important for them to be factored into your decisions.

A portfolio review gives you a chance to consider what key factors have changed in economies you're invested in and how this may affect your portfolio's value. Brexit is a current example of politics influencing investment portfolios, while environmental issues are increasingly affecting company values.

7. Your portfolio is losing value over the long term

Investments are highly likely to experience dips in value as markets fluctuate. But when you take a long-term view, beyond five years as a minimum, the value should be steadily increasing. If you look at your investment portfolio and see a sustained decrease in value it may be time to reassess your approach.

While you look at value, you should also consider the amount you're paying in fees. These can quickly eat into your returns if the service you're using isn't delivering value for money.

If you'd like to understand how your investments are performing and whether steps could be taken to improve the results, we're here to offer our support. Whether or not your circumstances have changed, we can help assess if your current investment strategy is suitable for your life goals.

Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

by danielashby

Why are Final Salary pension transfers increasing?

More retirees with a Final Salary pension are choosing to take their money out of schemes and transfer into a Defined Contribution (DC) scheme. But why are they choosing to give up an income that's guaranteed for life?

A Final Salary pension, also known as a Defined Benefit pension, pays a pre-defined amount on retirement based on a set of criteria. Often the criteria is based on how long you have been a member of a scheme and your salary when leaving. Final Salary pensions are sometimes referred to as the 'gold standard'. They're typically generous and the responsibility to ensure the pension is paid over your lifetime falls to the scheme trustees, rather than you.

The alternative is a DC scheme, which is now more common. If you're a member of a DC scheme, you make contributions to your pension, which are then usually invested. This may be supplemented by employer contributions and tax relief. The amount you have when you retire will, therefore, depend on the contributions made and the performance of the underlying investments.

Growing numbers leaving Final Salary schemes

Despite the certainty of income that Final Salary pensions provide their members with, more retirees are choosing to transfer out of them.

Figures released by the Financial Conduct Authority (FCA) show that between October and March 2016, 5,056 Final Salary members transferred their pension to a DC scheme. This increased sharply to 34,738 transfers during the same period in 2018; a rise of 587%.

While not all transfers are covered in the survey, the FCA estimates that it accounts for around 95% of DC contract-based pension schemes.

Why are Final Salary members transferring out?

When you're a member of a Final Salary scheme, you have two options when you reach retirement age. The first is to take the income the scheme provides. The second is to transfer out, taking the money offered and placing it with an alternative DC pension provider. The latter is a step you can take before retirement age, but the money transferred to a DC scheme isn't usually accessible until you're 55.

A few, but growing number, of Final Salary schemes, will also allow you to partially transfer. This would mean you take a lower guaranteed income and receive a lump sum transferred to a DC scheme, to compensate for the portion of income you've given up.

The growing number of retirees choosing to transfer can be linked to two main factors:

High values: When you approach a Final Salary pension provider to transfer, they will offer you a Cash Equivalent Value Transfer (CEVT). Operating Final Salary schemes is expensive for the pension trustees, and as life expectancy has increased, so has the cost of meeting responsibilities. As a result, many Final Salary schemes have been closed to new members and high CETVs are being offered to encourage existing members to leave. It's now not unusual to receive a CETV that is 30 or even 40 times higher than your expected annual income. With such high sums available, it's easy to see why some are tempted to cash out.

Pension Freedoms: In 2015, the government announced the biggest shake-up to pensions in decades with new Pension Freedoms. These changes aimed to provide more flexibility for those drawing an income from a DC pension, reflecting how retirement and lifestyles have evolved. From the age of 55, DC pension holders can now choose to access all their pension savings if they wish (although usually, only the first 25% is tax-free). They could also choose from purchasing an Annuity, providing a guaranteed income for life, or using Flexi-Access Drawdown, where money can be withdrawn from a pension as and when it's needed.

While transferring out of a Final Salary pension does offer you more freedom with how you access your pension, as well as potential Inheritance Tax benefits for passing on your pension when you die, there are some downsides to consider:

• You'll be giving up a guaranteed income: The impact of giving up a guaranteed income for life shouldn't be underestimated. It gives you security throughout your retirement. You won't have to worry about how investments perform or running out of funds in your later years. A lot of people underestimate their lifespan too, which is important to consider, as they may run out of DC pension income.
• You will need to account for inflation: The income provided by a Final Salary scheme is usually linked to inflation. This means that your spending power is maintained over time. If you choose to transfer out, you'll need to ensure that you've considered how inflation will affect your income over the course of your retirement.
• You may also be giving up other valuable benefits: Depending on your personal circumstances, a Final Salary scheme may also offer other important benefits. These could include a pension paid to support a spouse, civil partner or dependent should you pass away.
• You'll need to take responsibility for investment performance: With a Final Salary pension, the trustees are responsible for investment decisions and ensuring they can meet obligations. If you choose to transfer out, you'll need to take on that responsibility and poor investment performance or financial decisions would impact the income available to you.

One detail to remember when deciding whether to transfer a Final Salary pension is that it's final. Once you've left a Final Salary scheme, you won't be able to reverse your decision. It's therefore important to weigh up your options carefully. If you'd like to discuss your Final Salary pension and how transferring out would affect your finances, please contact us.

Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.

by danielashby