As explained in previous blogs, sky-high transfer values have made moving out of final salary pension schemes increasingly attractive.
But there are many other important reasons for considering a transfer to a private pension. These fit into the four categories of control; extra tax-free cash; dependants and inheritance; and weak employers.
Many of our clients find that the rigid rules in their final salary schemes no longer meet their needs. Transferring to a more flexible private pension helps you build a more suitable retirement income. This can be done in a wide range of ways, for example, in tax planning; managing your investment to match your income needs; and in being able to pass it to beneficiaries of your choosing.
Transferring also allows you to control timing. For example, you may want to take your pension earlier than the scheme retirement age, without incurring penalties. Transferring out could save you 3% to 5% a year in penalties if you retire early.
Or, you may want to defer your pension until after retirement age to preserve it for future generations. A transfer will help achieve this.
In a private pension, you choose how much or how little to take. You can supplement current income by phasing your retirement in stages; take a larger tax-free cash lump sum; and choose the level of income.
Read about how our client Alex’s final salary transfer gave him more flexibility and control.
Final salary schemes allow some tax-free cash based on formulas set by the scheme trustees. These calculations rarely match the 25% of tax-free cash available in a private pension.
If you transfer out, you can access the full 25% in one go or in stages, and use it as tax-free income if you wish.
We have helped many of our clients use large, tax-free lump sums to achieve their dreams. For example, Tina’s final salary transfer enabled her to take extra tax-free cash to fund her travel plans.
Final salary pensions offer rigid terms, usually including an index-linked pension for life plus a spouse’s and dependant’s pension. But if you have no spouse or dependants, the cash equivalent you receive from transferring out could be attractive compared to staying in. This is because the scheme usually assumes you have dependants so includes their benefits when calculating the transfer value.
For those with dependants, a transfer can also be attractive as it gives you more freedom in how you pass on your pension wealth. For inheritance tax purposes, private pensions are outside of your estate. That means they will pass on entirely tax-free if you die before the age of 75. If you die after age 75, tax is due at the marginal income tax rate of the inheritor. Either way, your beneficiaries can access the funds immediately.
Usually, a final salary pension is liquidated on the death of you or your immediate dependants. But a transfer crystallises the capital for you, your spouse and future generations.
If you have a shorter life expectancy, it’s even more beneficial to realise the value of the pension as soon as possible and to pass on its value to dependants rather than lose that back to the scheme.
See how transferring out of her final salary scheme allowed Brenda, another of our clients, to retire and keep some money for her husband and children to inherit.
If the company running your final salary pension fails, the scheme will move into the Pension Protection Fund (PPF), which is a compensation scheme.
Under PPF rules, if you are at or past the scheme’s retirement age at the time of insolvency, you will receive 100% of your pension. But those under that age get 90% regardless of whether they have retired or not; and their income is capped. The cap depends on your age – for example, if you are 55, the limit is around £28,000 a year.
You must consider this cap seriously if you expect a substantial pension but have doubts about the company’s solvency. Transferring avoids having to worry about any benefit limits in the event of insolvency.
Read about how our client Simon had doubts about his employer that led to a final salary transfer.
Final Salary Transferwise is an initiative of independent adviser Blackstone Moregate, which has provided specialist pension planning for 17 years. The team have a combined experience of 70 years.
We assess transfer suitability with a holistic review of all your financial affairs, including goals, assets, income, background, and risk appetite.
Our specialist tools and technical skills also help calculate whether your retirement income will last your entire life and never run out. The result is a fully-informed, professional and transparent recommendation.
With investment specialists in our team, we also explain new investments carefully and make sure they are right for you.
Transfers are not right for those who will rely on their final salary income. Also, anyone in an unfunded government scheme is not allowed to transfer. But, given the many other compelling factors, everyone else should at least consider whether a transfer is right for them.
To find out more, contact Vijay Thakkar at 020 3376 1444, email@example.com .