The introduction of new pension freedoms in 2015 and economic conditions that have propelled transfer values higher over the last few years have combined to encourage more of us to consider the transfer of our often fated ‘gold plated’ Final Salary Pension Schemes.
Such transfers offer the prospects of greater flexibility on when and how much we can draw from our pension schemes, potentially higher benefits over our lifetimes if our pension investments perform and the ability to transfer any residual pension funds to the beneficiaries of our choice on death, free of any Inheritance Tax charge.
However, from the Dutch Tulip bubble of the 1600’s through to the Tech Stock bubble of the late 1990’s history has taught us to be cautious of latest trends and base our decisions on a sound understanding of the case in hand rather than simply joining the herd. We have already seen MP’s asking questions around Pension Transfers from the British Steel Pension Scheme.
So consider how much do you need? Firstly, for most of us, our Pensions were set up to provide a source of income to fund our retirement. You may well qualify for a full Single Tier State Pension, currently up to £164.35 per week, however this is unlikely to provide the kind of retirement we generally envisage, with plenty of time on our hands to enjoy friends and family, our favourite hobbies and one or two holidays a year. Do your existing pensions, with there secure pension income, tax-free cash lump sums and spouse’s pensions already offer enough?
How long does it need to last for? With average life expectancies generally rising there is ever increasing pressure on our financial resources to maintain our aspirational standard of living in retirement and withstand the long-term inflationary pressures which will come to pass where we enjoy ever-increasing longevity.
Most of us will rely on both income and capital withdrawals when using unsecure personal pension funds, leading to an erosion of capital over time and the prospect of our funds disappearing within our lifetimes. Are you prepared to take this risk? And more importantly, do you have you sufficient funds from other sources to cope if things do not turn out as expected? Or would you prefer this risk to remain firmly in the hands of your Final Salary Pension provider and the Pension Protection Fund (PPF) if all else fails?
And are your expectations realistic? If a transfer appears attractive on the promise of higher lifetime benefits and the prospects of passing benefits on to your family after your death, remember these aims will compete for the same funds. And what levels of returns do you need to cover the increased costs of drawdown pensions and provide the additional capital and income to reward you for the extra risk you are taking.
At this stage you may think that I am against the idea of transferring Final Salary Defined Benefit Pensions. However, this is not the case. I have come across many examples of when a transfer makes good sense. This is generally where the client in question can retain a good level of secure pension income, such as State Pensions, Annuities, secure Rental Income and other Defined Benefit Pensions, sufficient at least to cover their basic costs of living over their lifetimes, however long.
Once they have crossed this threshold, the theoretical benefits of greater flexibility, higher potential returns and greater death benefits for their families are more likely to become a reality whilst retained secure income offers the capacity for loss to accept the potential downsides.
So if you are currently contemplating the transfer of your own Defined Benefit pensions please don’t just join the herd, consider your needs, consider your capacity for loss, consider your attitude to risk, make sure your expectations are realistic and most of all please take appropriate Independent Financial Advice.
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