A final salary pension transfer could bring very good tidings for you and your kin this Yuletide. It could allow you to protect your loved ones by leaving them a potentially large capital sum that would otherwise disappear when you die. With current high transfer values, opting out of your final salary scheme could make this Christmas very merry for the right families.
Unlike final salary schemes, you can pass private pensions to your dependents on death, so transferring one to the other crystallises the capital for your family and for generations to come. The pension freedom rules that came into force in 2015 make this even more attractive by allowing heirs to inherit the money tax-free if you die before age 75.
After that age, it is taxable as income on the beneficiary. Some contracts allow drawdown to continue in the survivor’s name, in which case, the tax is only on what they draw. Some pay lump sums only to survivors – in that case, income tax applies to the whole sum.
This attractive regime has made inheritance planning one of the biggest reasons for the rocketing number of clients and potential clients that are contacting us about a possible transfer.
Transfers are still not suitable for many. If you have a final salary scheme with an employer or ex-employer and rely on the income, the best advice is usually to stay in it because of the guaranteed and typically inflation-linked nature of the benefit. Also, anyone in an unfunded public-sector scheme is not allowed to transfer.
But for those in private sector schemes and funded government schemes and who have an income from elsewhere – for example, from rental income, businesses, or other investments – transferring can start to look like the gift that keeps giving.
If you stay in a final salary scheme, on death, it typically pays a 50% benefit to a spouse/dependent and only to children if they are dependent and in education. But that’s it – the capital sum then simply disappears back into the scheme. This means that if you and/or your spouse die early, the final salary scheme provides Scrooge-like value compared to a private pension.
Say you have a final salary pension paying £20,000 a year. Thanks to low gilt yields and the desire of companies to rid themselves of pension liabilities, transfer values are currently high – often offering 30 to 40 times projected income or more.
So if your value was say 35 times, transferring that pension would give you a capital sum of £700,000 – how’s that for a stocking filler? If your dependent invested it carefully, they could reasonably expect at least the same income they would have received from a 50% spouse’s pension, although they would lose the guarantee and investments can go up and down.
But most importantly, it would now be your family’s money, so you would be free to use it however you wish with all the flexibility and control that the new freedom rules bring. This could include a range of attractive financial planning options, depending on individual circumstances.
For example, adjusting income levels to maximise personal allowances, taking tax-free cash, gifting and other planning tools can all help maximise tax efficiency. Or, if you left the sum untouched, your beneficiaries would benefit from any investment growth.
Final Salary Transferwise is an initiative of independent adviser Blackstone Moregate, which has 17 years of specialist experience in pension planning. Before recommending whether or not to transfer, we conduct a thorough, holistic analysis of your affairs, including an assessment of the long-term sustainability of your income to ensure it does not reduce or run out before you die.
We use a range of specialist in-house tools and expertise, looking at all the pros and cons of transferring in the context of your goals so you can make an informed decision.
Given this golden opportunity, those eligible would be crackers not to consider their transfer options as soon as possible. Whether the advice is to transfer or not, you will have peace of mind that you made the right decision for your family this Christmas.