If you are considering transferring your company defined benefit (DB) also known as a final salary pension or ‘gold plated pension’ to a more flexible personal pension you will be making one of the most difficult decisions in personal finance and you owe it yourself and your family to get expert advice.
The conventional wisdom is that unless there are special circumstances, it is normally in your best interest to remain in your final salary pension rather than transfer to a money pension arrangement.
Whilst this basic premise remains true, the number of special circumstances has increased following the introduction of pension freedoms. These include:
If your final salary pension is valued at more than £30,000 you must seek advice from a qualified pension transfer specialist such as Better Retirement
It might seem tempting to exchange what might appear to be a modest monthly pension for a considerable pension lump sum, but the promise of a guaranteed pension for life is probably worth more than you think
A specialist transfer expert will conduct an in-depth analysis of your final salary benefits and compare this with benefits from a transfer to a new personal pension. This is something you probably cannot do yourself
Final salary company pensions pay the member (the person who has worked for the company) a guaranteed lifetime pension starting at their retirement date. The pension is calculated with reference to their salary and how long they worked for the company. The pension is paid directly out of the pension scheme which has been funded by the employer and the member may have also paid into the pension scheme as well.
There are two reasons for this. First the pension is often very generous compared to how much the member has into the scheme (some people didn’t have to pay at all but remember they were part of the salary package for your work so it’s their money just saved up for them).
Secondly, the amount of pension someone will get is guaranteed unlike personal pensions where the amount of pension income depends on investment returns and how much has been saved.
There are three main reasons why some people are transferring out of their final salary pension.
One of the rough and ready ways of looking at final salary transfers is look how big the transfer value is compared to the pension promise. For example, if someone was promised an inflation proofed pension of £10,000 and were offered a transfer value of £ 220,000 this is a multiple of 22.
Some people are getting multiples of 30 plus (some as high as 50) so it seems to be a lot of money. However, people should remember that the reason transfer values are so high is that interest rates and annuity rates are very low which means you need a lot of money to secure a guaranteed income.
You only have to read papers to see how some big companies are struggling to keep their pension promises. Although members are protected by the pension lifeboat if a scheme can’t pay it’s pensions it is a very big worry to people.
In the past, most people where happy to get a regular secure income without having to make complicated financial decisions when they retired. But today many people have more complicated circumstance and they want to have more flexibility and control over their pensions. After the age of 55 (under current rules) people can access their pension as a lump sum, as a guaranteed lifetime income, e.g. annuity, or through pension drawdown.
With the pension freedoms, people can not only decide how much income to take and when but on death, their pension pot can be left to the family. If death is before age 75 there is no tax to pay and after 75, tax is paid on any money paid out to beneficiaries.
In simple terms, the risk is that people will lose out by managing their own pensions compared to being paid a company pension.
It is very hard to compare the benefits a regular income compared with the benefits of the flexibility of drawdown but essentially there is trade-off between the security and peace of mind of a guaranteed income, the flexibility to control investment strategy, decide how much and when income is taken and the option to leave money to the family.
When I discuss final salary transfers with people I make sure all the risks are discussed and they weigh up the benefits from staying with the company pension with the benefits of transferring to a personal pension.