Are you one of the very fortunate minority who has a ‘gold plated’ defined benefit (often termed Final Salary) pension? You would be mad to give up the guaranteed income, right?
Well, the volume of transfers is currently at a record high and, according to the Pension Regulator, 80,000 of you took a decision to transfer in the last financial year. This figure is expected to rise beyond 200,000 in the current year. So, what’s going on?
Let’s look at three key reasons why people are transferring:
Income from your Final Salary scheme will start at a certain level (usually based on your service and final salary at retirement) and then rise each year in line with inflation. This is great, but there may come a point in retirement where you won’t spend as much money due to reduced mobility or just being more content doing less.
You can’t then reduce or turn off the income, so you will continue paying income tax on it and inevitably this builds up in cash in an environment where (unless some proactive action is taken) your estate could be subject to Inheritance Tax.
If you transfer the money to a ‘defined contribution’ pension, usually a Self Invested Personal Pension (SIPP), you have the flexibility to:
Very simply, transfer values are linked to changes in government bond (Gilt) yields. When the yields fall, it becomes more expensive for the pension scheme to pay the income to all its members, so transfer values increase.
Gilt yields are currently at historic low levels and thus transfer values have hit historic highs. Figures from pension specialists Xafinity suggest that transfer values have risen around 12% since June 2016.
Some schemes are now paying transfer values in excess of 30 times the Final Salary pension. This means that someone expecting a Final Salary pension of £30,000pa could receive a transfer value in excess of £900,000.
The death benefits for Final Salary pension members are limited. Once in payment, on your death, your scheme will likely pay 50% of your income to your surviving partner (or dependent children) and then, on the death of the survivor, the income stops. For single people or those who survive their partner, this offers no benefit.
If you move the transfer value to a SIPP, any money left on your death is passed on to your nominated beneficiaries either as a lump sum of cash (subject to tax on death after age 75) or as a SIPP of their own (with access to tax-free withdrawals if death occurs pre-age 75 or taxable withdrawals on death after age 75).
This is pretty compelling for those wishing to leave an inheritance for their children.
The biggest risk is that you are giving up a ‘guaranteed’ income source and taking on personal responsibility for providing and sustaining your own retirement income for life.
If you do transfer, you may be able to limit investment risk within the SIPP, depending on your income needs, but there is always a possibility the pot could run out or that you need to take an income cut to ride out falls in the stock market.
At Carbon we have a comprehensive process for helping members of Final Salary schemes build their financial plan and assess their options. If you think we may be of help to you, do get in touch for a no obligation chat over a coffee.
Stephen Rowntree is a Chartered Financial Planner at Carbon. Contact Stephen via email on firstname.lastname@example.org or get in touch with your local Carbon office.
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