The FCA confirm that transferring out of a final salary pension is unlikely to be in the best interest of most people.
A guaranteed salary-related pension that lasts lifelong, and is unaffected by the ups and downs of markets, is likely to be the best pension for most people.
However some people will want extra flexibility or want to ensure that they can pass on some of their pension wealth for whom a transfer might be the right answer. It is vital to take, and listen to, professional financial advice before making a big decision of this sort.
FIVE REASONS WHY A PENSION TRANSFER MIGHT BE SUITABLE
1. Flexibility – instead of taking a set pension on a set date, you have much more choice about how and when you take your pension. Many people are choosing to ‘front load’ their pensions, so that they have more money when they are more fit and able to travel, or to act as a bridge until their State Pension or other pension becomes payable.
2. Tax-free cash – some Defined Benefit (DB) pension schemes may offer a poor deal if you want to convert part of your DB pension into a tax-free lump sum. Although the tax-free cash is in theory, 25% of the value of the pension, you can often be penalised more than 25% of your annual pension if you go for tax-free cash; in a Defined Contribution (DC) pension, you get exactly 25% of the pot as tax-free cash.
3. Inheritance – generous tax rules mean that if you leave behind money in a DC pension pot, it can be passed on with a favourable tax treatment, especially if you die before the age of 75. In a DB pension, while there may be (but not always) a regular pension for a widow or widower, there is unlikely to be a lump sum inheritance to children.
4. Health – If you suffer or have suffered from ill health and therefore anticipate a shorter life you might do better to transfer if this means there is a balance left in your pension fund when you die, which can be passed on. Those who live the longest get the most out of a DB pension. Please note that HM Revenue & Customs may challenge this for those who die within two years of a transfer.
5. Employer solvency – while most pensions will be paid in full, every year some sponsoring employers go bankrupt. If the DB pension scheme goes into the Pension Protection Fund (PPF), you could lose 10% if you are under pension age, and may get lower annual increases; if you have transferred out, you are not affected.
FIVE REASONS WHY A PENSION TRANSFER MAY NOT BE SUITABLE
1. Certainty - with a DB pension, you get a regular payment that lasts as long as you do. With a DC pot you face the risk of living too long and your money running out, known as the “longevity risk”.
2. Inflation - a DB pension typically has a measure of built-in protection against inflation but with a DC pot you have to manage this risk yourself, which can be expensive.
3. Investment risk - with a DC pension, you have to manage the ups and downs of the stock market and other investments: with a DB scheme, you don’t need to worry - it’s the scheme’s problem.
4. Provision for survivors - by law, DB pensions have to offer a minimum level of pension for widows/widowers, etc., whereas if you use a DC pension pot to buy an annuity, it dies with you unless you pay extra for a “joint life” annuity, as you are effectively buying two pensions from the same pot.
5. Tax - DB pensions are treated relatively favourably from the point of view of pension tax relief. Those with larger pensions could be under the lifetime limit (currently £1,030,000) inside a DB scheme, but the same benefit could be above the limit if transferred into a DC arrangement and in such cases the tax repercussions can be difficult to manage.
TIME FOR A PENSION REVIEW?
Before considering transferring your pensions, it’s essential that you receive impartial professional financial advice about your particular situation.
ACCESSING PENSION BENEFITS IS NOT SUITABLE FOR EVERYONE. YOU SHOULD SEEK ADVICE TO UNDERSTAND YOUR OPTIONS BEFORE AND AT RETIREMENT.