Final Salary Pension Transfer is a complex business. It requires you to give up certain and guaranteed benefits in exchange for different freedoms and benefits that also come with risk attached.
Your reasoning has to be sound and thought through – the answer is not always black and white but it comes down to your personal situation and your individual goals. There is a lot to consider before you transfer your final salary pension but here are four questions you should be asking yourself before proceeding with a final salary pension transfer:
1. Is the value of your pension transfer ‘generous’ and fair versus the pension benefits you leave behind?
It is important that your pension transfer estimate (or Cash Equivalent Transfer Value CETV) represents at least fair value and is ideally ‘generous’ versus the pension benefits you leave behind.
Whilst the transfer value, as a lump sum, may sound like a lot of money, it is important to look at it objectively. With a personal pension, you will have to allow for the impact of inflation. There is the added risk that your investments can, and do, go down as well as up. Your personal pension fund could run out, versus a final salary pension that is guaranteed until your death. So you need to make sure that your calculations, based on the transfer amount, will allow you to meet your financial goals for the rest of your life. If there are dips in the market will you still be able to live comfortably?
2. Can you make better use of the flexible withdrawal options offered with a Personal Pension?
One of the key reasons why you may consider transferring your final salary pension is that you believe you can you make better use of the flexible withdrawal options offered by the transferring into a Personal Pension as compared to the options you have when remaining in the Final Salary Scheme.
If you do have other savings and investments, the ability to control your pension income, from one tax year to the next can often help you to be more tax efficient.
There are lots of ways in which individuals might want differing benefits to those offered by the scheme for example:
- It suits you and saves you tax to be able to take the cash sum early and defer the income withdrawal
- The transfer is big enough that you can preserve its capital value and leave a tax-free inheritance whilst still have enough income in retirement
- The guaranteed income offered from the Final Salary Pension is surplus to requirement; therefore the option to move this into a pension that has a cash value is more attractive, due to the flexibility and also the ability to pass wealth onto your family and loved-ones.
- Larger transfer offers can be compelling because they often belong to people with other assets and income such that they don’t need a guaranteed income in retirement and would prefer to use the transfer value in a completely different way, for example, to preserve its value as part of the family assets, donate to charity or help children get on the housing ladder etc.
- Smaller transfers can also make sense where there is a clear way to use the money which makes more sense to the individual than to take the lifetime pension, for instance clearing a mortgage.
- Ill health can be a compelling reason for some. If it’s clear your life expectancy has been shortened, then the chances are you and your family will get more cash from a transfer than staying in the scheme.
3. Are you comfortable with the extra responsibility of looking after an invested fund?
Unless you are a sophisticated investor, you will need to work with a financial adviser to manage and maximise your money to make sure you achieve your retirement goals. This will incur on-going costs so you need to be fully aware of these costs and be comfortable with them.
4. Can you cope financially if your pension pot gets run down?
If your Pension fund does not grow as expected, goes down or if you live longer than expected could you cope with a lower level of income later in life?
Generally, individuals will spend more in early retirement and less as they get older. That said, you may need to consider care home or assisted living costs in later life. It is important to know how you will cope if your investments don’t grow as you’d hoped and your pension pot gets run down.
Having other savings, sources of income and capital in retirement is a good way of mitigating the investment and longevity risks of going down the pension transfer route. Examples of such investments include:
- Other private pensions, including your spouse’s pension
- Your state pension
- Any ISAs and savings you may have
- Property – your home and any investment properties you own
- Stocks and shares
- Premium Bonds
With all these in mind, does a final salary pension transfer still make sense?
To Transfer or not to Transfer – other considerations
- Before deciding to transfer out of your final salary pension it is crucial you examine your entire financial standing. This includes any other pensions you may have, any investments, any savings accounts, or properties you and your spouse may have, as well as any state pension payments you are entitled to. It is essential to look at the whole picture and think deeply about how you will manage your future wealth. Your decision may affect your long-term ability to support yourself and your loved ones.
- Don’t make any knee-jerk decisions. Remember, Financial advice from a qualified Pension Transfer Specialist is a regulatory requirement for transfers of £30,000 or over, but is also highly recommended for smaller transfers too. In this new era of retirement planning there is everything to play for – so don’t dismiss any choices out of hand until you’ve been suitably informed.
- It is also important you don’t feel pressured. You can transfer your final salary pension at any point. Unless you are about to retire, you can leave it for another time, if you are currently unsure how to proceed.
- Understand that there may be other options available to you to help you reach your financial goals that don’t require you to transfer out of your Final Salary Pension. e.g. If you are concerned that your partner would receive less income in the event that you die before them, you could consider a life insurance policy to make up the shortfall.
- It pays to be informed. Whether or not you are currently considering a pension transfer, you should request a transfer value analysis then ask your financial adviser to give you an independent assessment of your various alternatives.
You might also like: Three Steps To Making A Successful Final Salary Pension Transfer
