Upon retirement, you may face several decisions regarding your finances and how to maintain a reliable income. There are many different ways in which you can do this, with final salary pension transfers a potentially beneficial option depending on your circumstance.
Final salary pension transfers do have an element of risk, so it is important to understand their intricacies and potential drawbacks to allow you to make more informed decisions in the future.
This article will seek to provide final salary pension transfer advice and answer any relevant questions, including:
What is a final salary pension?
A final salary pension, also known as defined benefits, can provide a guaranteed income for the rest of your life following your retirement. The value of your final salary pension is calculated using a percentage of your final salary, which is then multiplied by the number of years you have been registered in the final salary pension scheme.
Unlike a defined contribution pension wherein an employer or employee make regular contributions to a pension pot, the amount you receive under a final salary pension scheme is guaranteed and paid directly to you, without pressuring you to use your pension pot in future decisions.
There are two types of final salary pension schemes, these are:
In particular, this is because defined contribution schemes can lead to old age poverty should the individual survive longer, while final salary pensions may be unfair should the individual have earned more at some point in their career.
This YouTube video provides more information about final salary pensions.
What is a final salary pension transfer?
Typically, you will get access to your final salary pension at either your scheme’s normal retirement age or if you take early retirement. Usually, this may be set at 60 or 65 years old, and is the age at which your employer would cease to pay into your pension pot, and then begin to pay out its benefits.
It may be possible to defer the age you begin to receive your final salary pension benefits, and by holding off on receiving these benefits until a later age, you could experience an increase in your yearly income post-retirement. Generally, the rules regarding this vary between pension schemes, so it is worth checking with your scheme before making any decisions.
However, a final salary pension transfer involves you waiving your right to a pension in exchange for a lump sum fee. This lump sum fee would be invested in a defined contribution scheme and is known as your pension scheme’s cash equivalent transfer value.
The cash equivalent transfer value is a lump sum intended to be equivalent to the cost of the same pension scheme that would have been provided to you, and is determined by several factors including your age, health and final salary pension entitlements among more.
The cash equivalent transfer value must then be invested into either a personal or stakeholder pension, a pension drawdown vehicle, a pension scheme held by another employer or a self-invested personal pension, also known as SIPPs.
A pension fund transfer can guarantee an income for the rest of your life, including any benefits you would otherwise have been entitled to under the scheme.
By agreeing to a final salary transfer scheme, you are acknowledging the associated risk factors, especially if the cost of securing your guaranteed income is higher than anticipated, leaving you unable to match the benefits that would have been provided by a defined benefit pension transfer scheme.
As a result, you may find yourself being financially worse off throughout your retirement should you opt for a pension fund transfer than if you had remained a member of the scheme. This is not to say that you would be worse off in transferring your final salary pension, since the cost of securing an income may be lower than anticipated, and your fund’s value could increase in the future.
Should you have a final salary pension scheme in the private sector, then it is likely that you are able to transfer your final salary out. However, this may not be the case if the pension has been moved in a Pension Protection Fund as a consequence of funding issues.
Those who work in the public sector are often members of final pension schemes. For instance, this can include those who work in the NHS, the police force and the army among more. Despite this, public sector workers are often part of unfunded schemes, where the pensions they receive are from the government rather than an investment fund. Consequently, it is not possible to leave or transfer in this case.
As a result, it is entirely dependent on your pension scheme provider whether or not you are able to transfer your final salary pension, so it is worth checking with them.
Should I transfer my final salary pension?
By transferring your final salary, you may be unable to unlock much needed cash from it, aiding in paying off any debts and providing a valuable income in your retirement. However, the process is risky and you should always weigh up the advantages and disadvantages of such a decision.
Often regarded as golden pension deals, a final salary pension scheme can provide guaranteed income beyond retirement, with yearly inflation and death benefits making the scheme an attractive option to those approaching retirement age.
In order to receive a guaranteed income that could be liable to increased value as a result of inflation, you would need to buy a pension annuity. An annuity is a form of insurance which can allow you to exchange your pension savings for a more guaranteed income.
Below are some of the advantages and disadvantages associated with final salary transfers:
The pension reforms of 2015 may mean you could be entitled to transfer from a privately owned benefit scheme to a defined contribution pension scheme. This alteration to the pension freedoms has offered a new retirement option for thousands of people while resulting in a spike of transfers from defined benefit pensions to defined contribution schemes.
Another change included in the 2015 pension reforms was the scrapping of the 55% tax on the remaining value of your pension pot following your death. As a result, if you were to die prior to turning 75, any funds remaining in your pension pot are inheritance tax free. If however, you pass away over the age of 75, the funds can still be inherited by your beneficiaries, but they are subject to income taxation at their rate.
By transferring your final salary pension, your retirement pot changes from a being a theoretical amount to a rounded figure. This figure becomes guaranteed for either yourself or your family, and your pot is liable to increase in value upon transfer.
By taking out a final salary pension transfer, you may be able to invest your funds elsewhere as a result of the schemes increased flexibility. For instance, you could invest some funds in business ventures, investment bonds or your beneficiary’s future, such as education and healthcare.
The Financial Conduct Authority suggests that in the majority of cases, by leaving you are more likely to be financially worse off if you transfer out of a defined benefit scheme, in spite of the fact your employer may encourage or give you an incentive to leave the scheme.
By transferring away from your final salary pension, you will lose all of the guaranteed benefits that are associated with your scheme. As a consequence, it is important that you consider the benefits and guarantees provided by your scheme before choosing to transfer away from your final salary transfer.
By opting to transfer your pension, you are choosing to invest it. Once invested, you are putting your pension at risk, and your income is dependent on the success of your investment. Of course, it is absolutely recommended that you contact a pension transfer specialist, the Financial Conduct Authority, or the Pension Regulator, who can provide advice on the safest investments available.
Once you have transferred your pension, any benefits provided by the Pension Protection Fund are lost. The Pension Protection Fund is a scheme that acts as backup to support you if the final salary pension scheme should fail.
This article by The Telegraph highlights the potential benefits final salary schemes can have.
If you are thinking about transferring out of a final salary pension scheme, it is worth turning to a pension transfer specialist or the Pension Regulator for advice to aid you in your decision. Of course, here at UK Care Guide we are more than willing to help with queries and direct you to useful sources.
A professional financial advisor can also aid in finding secure investments with low risk, should you opt to transfer out of your pension scheme.
Known formally as self-invested personal pension, a SIPP is a form of investment vehicle you must transfer your final salary pension into, should you go ahead with the transfer.
Generally, you may find that you will be financially better off remaining in a final salary pension scheme instead of transferring your pension into a SIPP. This is also supported by the Financial Conduct Authority, who suggest pension transfer options are risky and could leave you at risk of old-age poverty going forward.
This is obviously dependent on your financial circumstance and the amount of disposable income you are willing to invest.
In order to transfer from a final salary pension scheme, you have to gain a cash equivalent transfer value from your last employer. The value of this is important since it can determine whether or not transferring out of your scheme is the right choice for your situation, before you transfer your final salary pension into a SIPP
These days, there are many sources on the internet that can calculate whether or not the cash equivalent transfer value is representative of good value and whether or not transferring is a sensible option.
That said, it is not a requirement to know your cash equivalent transfer value at hand when calculating, and an estimate can be generated using the annual pension income you should receive.
This Final Salary Pension Transfer Calculator is able to provide a valuation of your final salary pension, with only the age at which your final salary scheme permits you to withdraw from your pension, as well as your annual income.
Final Salary Pension Transfers can provide an opportunity to unlock cash from your pension scheme, although they do not come without risk. There are many pension transfer options available so you must consider all advice you receive before making any decisions.