Do You Know If Your Final Salary Pension Scheme Is Right For You?

Savings and Investments Singapore AAM Advisory

Much has been written about Final Salary Pensions since the introduction of Pension Flexibility in 2015.

A consensus is developing that the prevailing view that Final Salary Pensions are “Guaranteed” and therefore should never be transferred is wrong.

It is now widely accepted that more note needs to be taken of the needs, goals and circumstances of individual members when considering the right course of action.

Writing in her blog*, consumer champion and former Pensions Minister Ros Altman said “The benefits of a Defined Benefit pension may not be relevant to some people and, in fact, there are good reasons to consider transferring out.  That does not mean it will be right to actually transfer, but particularly with transfer values at such high levels, people may want to at least consider it because there are several potential advantages, particularly after the changes which have made Defined Contribution pensions far more user-friendly, tax efficient and effective for later life planning.”

There are many issues to consider when considering whether to transfer out of a Final Salary scheme and the complexity of these mean that you need advice from a fully qualified specialist in UK pension transfers.

Below I have set out the potential advantages and disadvantages of Final Salary Pensions and why a transfer might be in your interests.

  1. Such schemes pay lifelong pension income allowing you to plan without worrying about market falls
  2. Your pension income should last as long as you do
  3. Even if the company in charge of your pension scheme fails, the Pension Protection Fund (although the level of PPF benefits can fall in future if too many schemes fail) will provide a degree of protection for your pension
  4. You don’t have to choose how to invest your pension fund or how to take income, the Pension will make these decisions for you and the promised income (or PPF benefits) should just be paid to you for life
  5. Final Salary Pensions may pay some pension to your spouse if you die first – some pay something to dependent children too
  6. Pension income built up through membership of a scheme since 1997 has to have some inflation protection (some schemes do offer inflation protection before that too)
  1. Such schemes pay lifelong pension income allowing you to plan without worrying about market falls
  2. Your pension income should last as long as you do
  3. Even if the company in charge of your pension scheme fails, the Pension Protection Fund (although the level of PPF benefits can fall in future if too many schemes fail) will provide a degree of protection for your pension
  4. You don’t have to choose how to invest your pension fund or how to take income, the Pension will make these decisions for you and the promised income (or PPF benefits) should just be paid to you for life
  5. Final Salary Pensions may pay some pension to your spouse if you die first – some pay something to dependent children too
  6. Pension income built up through membership of a scheme since 1997 has to have some inflation protection (some schemes do offer inflation protection before that too)
  7. Although the pension income should be guaranteed for life, there is a chance that your scheme will fail, and the income you were promised could be cut. This needs to be factored into your decision, especially if the employer sponsoring the scheme is in difficulties
  8. If you have a very high level of income from your Final Salary, it can be severely reduced by the PPF cap
  9. PPF benefits could possibly be reduced in future if too many schemes fail (although currently the fund has been run very well and is in surplus, so this seems unlikely at the moment)
  1. If you die relatively young, you can pass on your pension fund to whoever you wish. If you die before age 75, it will pass on free of all tax, whether it is spent now or in future. If you die after age 75, you can pass it on tax-free and it stays tax-free until the person who inherits it takes money out
  2. Your spouse can inherit your pension fund in full (rather than only a fraction of the income)
  3. If you have other guaranteed income, you may find a capital sum more useful
  4. You have ownership of an individual pension fund in your own name instead of an income entitlement that is either fixed, or rises by inflation or a small percentage each year
  5. You can be in control of your own investments and have a chance to grow your eventual pension
  6. Transfer values are currently at record highs. You may be surprised at just how much your pension is worth. For example, a small Final Salary Pension worth £500 a year for life, could actually give you a capital sum of £10,000 – £20,000 to put into a Money Purchase Pension. A Final Salary Pension that would pay £20 a week for life, could give you £20,000 – £40,000 capital sum to invest in a Money Purchase Pension
  7. If you have other pensions elsewhere, (many people have more than one Final Salary Pension from past employers), then consolidating these can give you a fund that you can invest for future growth. You would also be able to pass these on to others or to support you if you become ill or die young
  8. If, later in life, you need to pay for social care then having a pot of money in a tax-free Money Purchase Pension could be a sensible way to build up a ‘care’ fund. One in four of us is likely to need thousands of pounds for social care in later life, but almost nobody has money set aside for that purpose. Giving up a small amount of lifelong pension income for a lump sum that can grow over the years to help with care costs can be a sensible choice for some
  1. You give up a lifelong income stream
  2. You will have to pay fees on your Money Purchase Pension fund which might reduce your future pension income
  3. Your fund may have poor investment performance, so your future income may not be as high as the pension you gave up when you transferred
  4. You will have to monitor your investments in a Money Purchase Pension for future years, whereas the Final Salary Pension should be looked after by trustees and paid out to you regularly over time
  5. Under current legislation it is easier to go over the lifetime limit in a Money Purchase Pension, meaning you may have to pay additional tax – be sure to get advice on your tax position before deciding to transfer out
  1. How reliant will you be on this pension for your retirement income?
  2. Do you have other funds you can use to support you in retirement?
  3. Might you be in poor health during your retirement and so not be able to draw the guaranteed pension income for very long?
  4. Do you intend to retire suddenly or ease yourself into retirement by cutting back on your hours or changing job?
  5. Are you likely to have to pay higher rate tax on your pension income?
  6. Do you want to pass pension assets on tax-free to the next generation if you don’t need them yourself?
  7. Do you need a guaranteed income for yourself or a partner or do you wish the flexibility to vary your income in line with your needs?
  8. Do you have other monies that could help fund care or might you want to use your pension?
  9. Do the Final Salary Pensions you have offer inflation protection (not all pensions accrued before 1997 will have inflation linking)
  10. Are you happy to pay fees and keep investing to grow your fund further in future?
  11. Do you understand the tax implications of transferring out (BEWARE, this is complex!)
  12. Does the person analysing your options have
    • relevant qualifications, these are exams known as G60 or AF3? If not it would be prohibited for this person to provide this type of advice in the UK – should you accept a lower standard because you are living outside the UK?
    • experience of providing this type of advice for more than 20 years? There is no substitute for experience when considering the myriad types of pensions and the issues which must be considered

It is important that you understand these issues and how they may affect you before you commit to any transfer out of a Final Salary Pension.

A transfer may be right for you, especially with the current very high transfer values being offered, but it is vital that you seek advice from a fully qualified specialist in UK pension transfers.

AAM Wealth Solutions can provide you with a detailed UK Pension Audit, which will consider these issues in light of your needs, goals and circumstances and make a recommendation showing the right course of action for you to achieve the best retirement outcome.

Why you should have an AAM Wealth Solutions UK Pension Audit now

Every AAM UK Pension Audit is checked by Ian Black, a UK Qualified Chartered Financial Planner with over 20 years of experience in the provision of pensions advice. Ian is the holder of the CII G60 qualification in addition to being a Fellow of The Personal Finance Society, the UK’s premier professional body for Financial Planners.

You will always receive a full recommendation on your Optimum Pension, whether that is the pension(s) you already have or an alternative.

An AAM UK Pension Audit will put you in an informed position, able to make informed choices about your Optimum Pension and how best to secure your perfect retirement.

Contact your AAM Financial Planner now to arrange your UK Pensions Audit or email wealthsolutions@aam-advisory.com.

Ian Black
Head of Wealth Solutions
AAM Advisory Pte Ltd

Source:

*http://pensionsandsavings.com/pensions/transferring-out-of-guaranteed-employer-pensions-can-be-a-good-idea/

Disclaimer:
This article is an op-ed piece by Ian Black. The views expressed in this article are those of the author and do not necessarily reflect the views of AAM Advisory Pte Ltd. This document/article should not be construed as an offer, solicitation of an offer, or a recommendation to transact in any securities/products mentioned herein. The information does not take into account the specific investment objectives, financial situation or particular needs of any person. Advice should be sought from a licensed financial adviser regarding the suitability of the investment product before making a commitment to purchase the investment product. Past performance is not necessarily indicative of future performance. Any prediction, projection, or forecast on the economy, securities markets or the economic trends of the markets is not necessarily indicative of future performance. Whilst we have taken all reasonable care to ensure that the information contained in this document is not untrue or misleading at the time of publication, we cannot guarantee its accuracy or completeness. Any opinion or estimate contained in this document is subject to change without notice. The above report may contain data obtained from third parties and as such we cannot guarantee the accuracy of this data.