One of my clients who was transferring out of her employer’s final salary scheme into a private pension told me recently that she wanted to be able to stroke her pension like a cat. It is a great metaphor to help visualise and understand why such transfers have become popular.
Staying in an employer’s final salary pension – with its cast-iron guarantees of income – is still the best option for most people. But an increasing number are finding that transferring it into a private pot gives them the ownership, tangibility and control they seek.
An estimated 210,000 people moved £50 billion out of employers’ final salary schemes in the two years to May. This transfer bonanza is happening for two reasons. The first is the pension freedom rules that took effect in 2015, giving over-55s more control over their private pensions.
The second is the high transfer values available because of falling government bond yields combined with many employers’ desire to reduce their pension liabilities. Many of my clients have seen their transfer values soar to 30 or 40 times projected annual income as a result. The highest I have seen is 52 times.
For some, this has created a purr-fect scenario of enhanced control and financial positioning. At such great rates, many would be foolish not to explore the possibility of transferring.
An attractive transfer value does not always mean it is right to move out of your defined benefit pension.
Most final salary schemes offer a fixed formula that includes pension, spouse’s pension, and dependents’ pension for children under a certain age. It is usually inflation-linked and has few risks – even if the sponsoring company goes bust, the Pension Protection Fund guarantees a large part of the scheme.
People in ‘unfunded’ government schemes – including teachers, civil service and the NHS – are not allowed to transfer. It only applies to private sector and funded public sector schemes.
Also, if you will be living on the pension, with no or little income from other sources, the guaranteed nature of a final salary scheme means a transfer is usually not suitable.
For example, one client’s scheme offered a highly attractive transfer value of 42 times projected income. But after a full analysis, we found he was still better off not transferring because the secured income was central to his retirement plans, so could not risk losing the guaranteed income.
The high values, ownership and control can all work well for those who do not need to live off the income from that scheme. For example, they may have income from other assets – such as property or other investments. Or they might have several defined benefit schemes providing more income than they need in total, so look to transfer one.
For these people, transferring can bring much more control in areas such as inheritance planning, tax-free lump sums, early retirement and ill health.
Transferring crystallises your pension into a capital sum that you can pass to dependents tax-free if you die before age 75, and taxable as income on the beneficiary thereafter. This can enable a range of inheritance planning options, depending on individual circumstances. In a final salary scheme, dependents may get a pension on death, but there is not normally a capital sum – that stays with the employer.
Private pensions also now provide much more freedom in when and how you can take the money, which can be helpful for many reasons, including tax planning. For example, in a final salary scheme you usually cannot take the income until you are 65 without a potential financial penalty. With a modern private pension, you can take income and up to 25% of the fund as a tax-free lump sum from age 55, without restriction or penalty.
You can control the amounts you draw according to your other allowances and tax bands. If you decide you want a guaranteed income later, you can still do that with an annuity purchase.
If you have health issues, transferring would enable you to take the money earlier, while you can still enjoy it. But even many healthy people simply do not want to wait until they are 65 to get their money. They may have any number of life goals that a transfer would enable, such as paying off a mortgage or helping their children onto the property ladder.
Transfers can also work well for people who want to use the money to enhance their business, for example, through buying commercial property tax efficiently in a self-invested personal pension.
Final Salary Transferwise is an initiative of independent adviser Blackstone Moregate, which has 17 years of specialist experience in pension planning.
To assess pension transfer suitability, we provide a comprehensive, holistic review of all your financial affairs, including your income, assets, background, goals and risk appetite.
Crucially, we also use our specialist technical skills and tools to assess the long-term sustainability of a potential transfer. This helps ensure that it does not affect your retirement income into old age, and that you never run out of money.
The result is a professional, transparent and fully-informed personal recommendation about whether a transfer is right for you.
If it is, it can lead to a fantastic feeling of control. In the words of the client I mentioned at the start, ‘I want to know that pension is mine, not someone else’s – to see it and control how and when I take the money.’
In terms of enhanced financial well-being, that can be the cat’s whiskers.