We have been advising clients on final salary pension transfers since 1999 and are specialists in this field.
A Final Salary (or Defined Benefit) Transfer involves swapping your pension entitlement for a cash sum which must be put into a registered, or HMRC recognised, pension scheme.
- If you are under age 55 -> you can transfer into a Personal Pension Plan and invest in one or more funds in line with your objectives and attitude to investment risk. At age 55 you can then move into Drawdown or purchase an annuity.
- If you are aged 55 or over -> you can transfer into Flexi-Access Drawdown (Pension Drawdown). You can choose to take up to 25% (a quarter) of your pension pot as a tax-free lump sum. The rest is then invested in one or more funds within your pension, and you are able to take a taxable income at times that suit you. Typically, people use it to take a regular income.
You choose investment funds that match your income objectives and attitude to risk, and set the income you want. The income you receive may be adjusted periodically depending on the performance of your investments.
Once you’ve taken your tax-free lump sum you can start taking income right away or wait until a later date.
Final salary transfers are not new, they have been a legal right to deferred pension scheme members since the eighties. So why are they now a more attractive option?
Considered opinion has been that that for the vast majority ‘best advice’ is to stay in schemes and so the option of a transfer has often only been brought to the attention of those with very big pension entitlements and by specialist advisers. In most cases they simply have not been discussed with members. Employers are not able to provide advice on transfers and many financial advisers are not qualified to advise on them, or have been prohibited from advising on them by compliance departments viewing them as too complex and too risky (for the adviser that is). So for many, the transfer option will never have been discussed. So why consider them now, what’s changed?
There are two significant underlying reasons:
- The 2015 pension simplification rule changes provide huge choice as to how pension savings can be used in retirement. These choices are not available to those who go on to retire on a final salary pension but can be accessed via a transfer and will be attractive to many.
- Transfer values, Cash Equivalent Transfer Values or CETVs relative to future pension entitlements are currently very high due to exceptionally low gilt yields.
Low gilt yields and interest rates are why we currently have a great window of opportunity to consider transfer values. These conditions may prevail for a few more years, but are unlikely to last forever. Increases in gilt yields from current levels would result in lower transfer values.
The likely suitability of taking a transfer will come down to very personal circumstances and objectives. Our experience is that whilst members looking to transfer generally share the same motive to control their own destiny, no two individuals’ situations are the same and how transfers get used can vary enormously.
Factors to consider when deciding whether a final Salary Transfer is right for you
The table below highlights some of the important factors that you should consider when thinking about whether to transfer out of your Final Salary Pension Scheme. Both options have their benefits and, depending on your personal circumstances, one could be more appropriate in meeting your long term needs.
* Comparisons based on typical bank final salary schemes we have advised on going into Pension Drawdown
It is important that as part of your final salary transfer you contuinue to receive ongoing advice in managing your fund and ensure that your plan remains suitable given your evolving individual circumstances.
Your relationship with your advisor is a key part of feeling confident about your pension and making sure you continue to be correctly invested. It is important to remember that markets go down as well as up and that the value of your fund may go down and up as a result. Your advisor is there to make certain you understand the risks of investing and ensure you are invested at a level that is commensurate with your attitude to risk.