Should I stay or should I go now?
For many years, Independent Financial Advisers have considered transferring benefits out of a Final Salary (Defined Benefits) Scheme to be a very bad idea. However deferred scheme members have seen transfer values (known as Cash Equivalent Transfer Values or CETV’s) rocket because of BREXIT, the fall in the value of sterling and the resulting fall in Gilt yields. This increase has meant that the decision on whether to transfer out of a Final Salary Scheme has become much more finely balanced.
In the past, there was often little logic in transferring away from a Final Salary Scheme because of the requirement for the transferred funds to be used to buy an Annuity (a similar guaranteed income) from age 75. Taking ‘ownership’ of the transferred funds was therefore short-lived. The introduction of the Government’s Pensions Freedoms legislation on 6th April 2015 has changed the landscape completely. While the new legislation had no impact on Final Salary benefits, complete flexibility is now available with Personal Pension funds.
The Financial Conduct Authority (FCA) has not laid down any specific new rules in the light of the change in legislation, but does accept that there are several reasons why clients may now wish to consider transferring out of a Final Salary Scheme. Some of the reasons are:
Transferred funds become an asset of the individual. Final Salary Schemes provide a lifetime income (known as a Scheme Pension) from the scheme’s assets. The scheme member never actually owns the asset.
Following a transfer, the member can take ‘what they want when they want’ from their fund. Final Salary benefits are index-linked in payment and cannot be altered.
The amount of tax-free cash available from a transfer is often higher than the amount available from a scheme. Outstanding debt repayment such as paying off a mortgage can influence the amount of tax-free cash required at retirement.
Death benefits are often significantly higher if benefits are transferred. This is particularly true if the member is single at the time of death.
Following a transfer, benefits can be left to a dependent or anyone else that the policyholder wishes to nominate. Final Salary benefits can only normally provide benefits to a dependent (i.e. a spouse or dependent children of the member)
Future investment returns are the main risk associated with transferring away from a Final Salary Scheme. Poor returns and high withdrawals may mean that funds run out before death. Final Salary Schemes provide peace of mind because the income is index-linked and guaranteed.
Where transfer values from Final Salary Schemes exceed £30,000, it is now a legal requirement for advice to be sought. There are many aspects to consider and at HDA we are very experienced in explaining all the pros and cons.
If you are interested in reviewing your pension situation, please contact us.
Note: This article only relates to Deferred Final Salary Scheme benefits. If you are an active Final Salary scheme member you should always remain in the scheme.
To discuss further or to arrange a face to face meeting please contact us.