The number of people transferring their Final Salary pension has risen by 50% over the past year (Source: Royal London).
Driven by a combination of Pension Freedoms, unusually high transfer values and a general distrust of pensions, it is clear more people than ever are considering moving away from their Final Salary pension.
Final Salary and Defined Benefit pensions (for ease, we’ll stick with using just Final Salary) provide a guaranteed income, which is usually inflation proofed, in retirement. That income will continue until you die. Usually, a spouse’s pension is also payable if you die before your husband or wife.
So, if Final Salary pensions are so attractive, after all, a guaranteed, inflation-proofed income, is hard to come by these days, why are so many people transferring away?
Reasons for transferring Final salary pensions
Research from Royal London shows the top five reasons people transfer their Final Salary pension:
1. The ability to provide a more flexible income in retirement: 83%
Pension Freedoms have been hugely popular. The new rules have given people far more flexibility in the way they access their pension. Allowing many to retire early, or take lump sums while still working.
However, Pension Freedoms are not available for members of Final Salary pensions and can only be accessed by transferring the accumulated value into a Money Purchase arrangement; such as a Personal Pension or Self-Invested Personal Pension (SIPP).
2. Large current transfer values: 78%
Falling gilt yields, coupled with a desire from pension trustees to reduce the strain some schemes are under, mean that transfer values from Final Salary pensions have been relatively high over the past few months.
Although they are now showing signs of falling back to more normal levels, there’s no doubt that higher transfer values have triggered many people in to transferring their Final Salary pension.
3. Inheritance considerations: 69%
Final Salary pensions usually only pay a pension to your surviving spouse or civil partner when you die after drawing the pension.
However, Money Purchase arrangements, such as Flexi-Access Drawdown (FAD), Personal Pensions and SIPPs, the usual ‘home’ for Final salary transfers, have far more flexible options on death. These include the ability to leave a lump sum to your loved ones.
For many people, especially those who are single and therefore do not require the spouse’s pension from the Final Salary scheme, being able to leave their pension to others, or indeed charity, when they die, is very attractive.
4. Access to greater tax-free cash: 57%
All pensions allow us to take a proportion of their value as tax-free lump sums.
It may be the case that by transferring your Final Salary pension the amount available tax-free increases, or could be taken sooner.
5. To take benefits earlier than in the Final Salary scheme: 44%
Every Final Salary pension has a normal retirement date. While it is possible to retire and take your income early, there are usually penalties for doing so. By transferring away, you will avoid these penalties, although, it is possible that your income, in the long run, will actually be lower.
Not always the right thing to do
There are many occasions when transferring your Final Salary pension is not the right thing to do. As part of their research, Royal London asked advisers to give the main reasons why they recommend some people should not transfer their Final Salary pension. The three most popular were:
1. Concerns about losing the certain income from the Final Salary scheme: 81%
The guaranteed income provided by Final Salary pensions is one of their key attractions for members. Giving it up should only be done after receiving independent financial advice and is often the wrong thing to do, no matter how tempting it is to transfer a large amount of money in to a different arrangement.
2. Investment risk associated with the transfer not appropriate to client: 65%
Transferring the guaranteed benefits of a Final Salary pension into a Money Purchase arrangement means taking on more risk. In other words, the value of the pension pot could fall, with a consequential decrease in income. Those people who aren’t prepared to accept that risk, or couldn’t cope with a drop in income, should think very carefully about whether to transfer their Final Salary pension.
3. Transfer value represents ‘poor value’: 59%
This is an interesting one, as until recently transfer values were on the increase. However, it’s clear that some advisers are still of the opinion that, probably relative to the income the pension would produce, the transfer value offered is too low to make it appropriate to move.
The new Pension Freedom rules state that anyone transferring £30,000 or more from a Final Salary pension can only do so after having taken independent financial advice.
For an irreversible decision, which means giving up a guaranteed, inflation-linked income, we believe that’s sensible and could stop some people making the wrong choice.
There’s no doubt that the lure of seeing many hundreds of thousands of pounds transferred to your own pension is strong. However, that doesn’t mean it is always the right thing to do. In fact, the wrong decision could lead to significant financial hardship in retirement.
That means independent financial advice is crucial. Not just because the law says you have to take advice, but because by doing so you will make the right decision for both the short and long-term.
Here to help
We are Independent Financial Advisers with experience of dealing with Final Salary pensions and an in-depth knowledge of the things you should consider before you transfer yours.
If you are considering a Final Salary transfer we are here to help you make the right decisions. Call us on 0800 612 8099 or complete our online enquiry form by clicking here.