Before discussing the pros and cons of transferring a final salary pension I feel I should explain what a final salary pension actually is.
There are generally two types of pension you can have. One where you control your own pot of retirement savings and one that is controlled by your current or previous employer
With category one you will never know how much your pension will be worth at retirement as it will depend on how much you contribute and how well your investment choices have performed over the years.
Final salary pensions fall into category two and the pension income you will receive at retirement is more certain as it will be determined by a set formula based on a proportion of your salary. The company who run the scheme will manage the entire pension fund on behalf of all employees (current and former) and also take on the investment risk.
Public sector pensions are mainly final salary schemes.
In the past final salary pensions were considered very generous and the ‘gold standard’ of retirement income. In more recent times companies have closed these types of pension as they have become unaffordable.
Recently there has been a lot of talk in the press about whether people should transfer their final salary pension into a personal ‘pot’ so you can take over management of the pension yourself. This does not apply to public sector pensions as the majority are unable to be transferred.
Before deciding on whether to transfer your final salary pension you will need to ask your pension administrator for a Cash Equivalent Transfer Value (CETV). This will tell you the monetary value of your final salary benefits.
More detail on final salary pensions can be found on the Pensions Advisory website.
Advantages and disadvantages of transferring a Final Salary Pension
- You’re in control – you don’t have to worry about your current or former employer going bust.
- More flexibility on when to start your pension – you can decide to withdraw your pension anytime from age 55 whereas a final salary pension will penalise you heavily if you withdraw from your pension before the scheme’s retirement age (likely to be 60 – 65).
- More flexibility on how to withdraw your pension – Your final salary pension is restricted to paying out a set level of income and cannot be changed. By transferring you open up the possibility of using your pension like a savings account and withdrawing as and when you want or need to.
- The potential for greater death benefits for your family – Usually a final salary pension will pay a reduced pension income on your death to your spouse/civil partner only and then once they’ve gone, nothing. Once transferred you can leave the pension ‘pot’ to whoever you like and this can continue to be inherited down the generations.
- Greater opportunity for Inheritance Tax planning – Pension ‘pots’ are not subject to Inheritance Tax so if you have other guaranteed income and don’t need to touch your final salary pension income then your could protect the value by transferring.
- If you need the income it will be very difficult to reproduce the same level of income from a personal pension when compared to the guaranteed nature of a final salary pension.
- By transferring you are in control of the investment of your pension. Investment markets go up and down all the time and if you make the wrong choice you could find your pension value is significantly reduced.
- You don’t need to worry about living a long life as your final salary pension will continue to pay you an income for as long as you live (providing the company and pension scheme remains solvent). If transferred the ‘pot’ could run out one day.
- Loss of peace of mind – By keeping your final salary pension you can retire knowing exactly what income you will receive. By transferring you may worry each month about whether your pension has gone up or down in value.
- Deciding to transfer is an irreversible decision.
What to do next if you are considering transferring a Final Salary Pension
Transferring a final salary pension is a life changing decision and should not be taken lightly. Unfortunately there is no right or wrong answer and it will depend on your own individual circumstances.
If it’s something you are considering, you need to carry out a full review of your final salary pension, here’s what to do:
- Seek professional advice – The government have actually made this a legal requirement when it comes to final salary pensions anyway. You need to ensure the professional you use is appropriately qualified. I am happy to say we certainly are and would be happy to help.
- Make sure the professional you use charges you an upfront fee for a full review rather than getting paid from the transferred fund. If they only get paid once the pension is transferred don’t you think their advice might be biased?
- If you are still looking for more information we have a produced a FREE Pensions and Retirement Options guide which can be downloaded here.
- Don’t listen to your friends or work colleagues. Yes transfer values offered on final salary pensions are currently at record highs however just because it is right for one person doesn’t mean it is right for you.