Andy Coles of Beaufort Financial weighs up the pros and cons of transferring your final salary defined benefit occupational pension scheme.
Speaking at a recent seminar alongside ex-pensions minister Sir Steve Webb, Andy went through the options available to those who are thinking about making this decision. Some 67,000 pensions were transferred out in the year ending 31st of March according to The Pensions Regulator. In reality, the unofficial figure is likely to be nearer 80,000.
Why is this happening?
The main reason is because cash equivalent transfer values (CETV) are at their highest ever. A combination of a thirty year Bull market in bonds, 10 year Gilts at an all time low (the technical reasons), coupled with a desire by employers to reduce the number of former employees in the occupational pensions schemes that they run. Employers want to “de-risk” their pension schemes and encourage former employees to transfer their pensions to another provider or pension plan.
As an incentive the CETVs are very high; perhaps 20 times the annual income a pensioner is forecast to receive from an old final salary pension that may very well have been forgotten about. Sometimes the valuations are over 50 times – a clear sign that the trustees who look after the pension schemes on behalf of the employers (past and present) are very keen for pensioners to take their retirement money. For example, if you had worked at a company offering a final salary scheme for 15 years when you were younger, but since changed jobs, your pension income from that employer may now be worth say £10,000 per annum when you reach retirement age. In order to get you “off the books”, the employer offers you a CETV of £200,000, which can be moved to another pension vehicle that your adviser recommends, even if you are still working and well below the retirement age.
This opportunity is not available to civil and public servants, unless they have also worked in the public sector.
Is this a good thing?
Remember, it is a transfer to another approved pension scheme, not a cheque for you to cash in, although there are circumstances where you can, under the Pensions Freedom laws, take lump sums from your pension (if you are over 55 years of age), although this does come with potential tax consequences.
If you stay with your original final salary pension you can expect a guaranteed income for life, which is inflation proof, carries virtually no risk, costs you nothing and means that you can budget with ease and, in many cases, your spouse gets it when you die. So for the majority of people, not transferring a final salary pension will be the right thing in to do.
However, there are scenarios where transferring is the right thing for a client; it can provide flexibility and greater scope to use your pension as and when you want. This is normally useful for people with other income generating assets such as shares in a business, a buy-to-let property portfolio, or significant ISA portfolios which can be used to provide another source of income in retirement.
If you are in poor health and don’t expect to live long, transferring out could be an attractive option as the death benefits can be significantly better outside of a final salary pension, particularly if you’re single with no dependents.
Each case is different
Seeking professional and independent financial advice is essential. It is a huge, game-changing decision; potentially the biggest of your financial life, and your adviser will guide you to reach the best outcome for your individual situation. They will help you map out your expected living costs, now and in retirement, while showing how you will potentially fund this; we call this cash flow modelling.
This provides a valuable plan for clients, even if the advice is to remain within the final salary pension, understanding your future retirement plan can as important as the underlying assets, as retirement is no longer being given a carriage clock at 65 and heading into the sunset! Retiring is a very individual experience, and expert financial planning can help to provide you with a fulfilling retirement without the worry of financial hardship.
Take the first steps in mapping out your retirement plan now, by taking some time in filling out our Cash Flow planning questionnaire, which will get you thinking about how you would like retire.