Getting advice on whether to transfer your final salary pension to a private scheme could be the best new year’s resolution you have ever made. If you have been putting this job off, you should do it now for several important reasons.
Moving out of a final salary scheme has become much more attractive in the last few years due to higher transfer values, but these values are likely to start falling.
The high values are available due to employers’ increasing desire to offload their pension liabilities combined with low government bond yields, partly caused by low interest rates. Consequently, many of my clients’ transfer values have grown to 30 or 40 times projected annual income – I even saw one at 52 times. This is much more than schemes have tended to offer in previous years.
This means anyone on a reasonably good salary, can crystallise their pension into a life-changing sum. For example, someone on a £60,000 salary who had worked for a company for 20 years would typically receive a £20,000 annual income from their scheme. If their transfer value was 40 times, that means they would receive an £800,000 capital sum by transferring out.
But last month, the Bank of England increased interest rates for the first time in a decade – from 0.25% to 0.5%. With UK inflation continuing to climb to a near six-year high of 3.1% in November, boosted by the post-Brexit fall in sterling, the Bank looks likely to keep raising rates in 2018. This could lead to higher government bond yields, which could reduce the transfer values that companies offer.
Another reason for the popularity of transfers in the last two years is the pension freedom rules, which came into force in April 2015 and which gave people much more control and flexibility over private pensions. These rules enable transferees to retire at 55 rather than 65 (the typical retirement date in a final salary scheme) or use the money however else you wish; and or keep it for their dependants to inherit.
For example, you could pay off your mortgage; help your kids onto the property ladder; buy that vintage car you always wanted; or use the money in your business, say to purchase premises. It is also beneficial if you have shortened life expectancy.
I don’t expect the government to alter these popular pension freedom rules soon, but politicians do tinker with pensions regularly, so it makes sense to take advantage of this sweet spot of opportunity while you can; and while you are young enough to enjoy it most.
Another reason for some people to look at transferring is that they do not want their retirement income to depend on the financial viability of their employer or ex-employer. If that company went bust, the scheme could be transferred to the Pension Protection Fund (PPF), potentially on lower benefits.
Recently, we have seen pension benefits come under threat at British Steel and British Home Stores, for example.
Transferring is not right for many people – especially those who will rely on the guaranteed income from their final salary scheme in retirement; and those who would not feel comfortable investing their money in the stock market. Also, anyone in an unfunded government scheme such as NHS or military are not allowed to transfer.
But for those outside such situations, we think it would be a mistake not to consider transferring as soon as possible.
Final Salary Transferwise is a part of independent adviser Blackstone Moregate, which has 17 years of specialist experience in pension planning.
We can assess whether a transfer is right for you 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 evaluate whether your retirement income will last your entire life and that the money will never run out. The result is a fully-informed, professional, transparent and personal recommendation.
We also have investment specialists in our team. So if a transfer is appropriate, we make sure the new investments are right for you and explain them carefully to give you peace of mind.
If a transfer is right for you, it could lead to a significant financial improvement for you and your family – definitely time to pop some champagne corks in 2018!