Final Salary Pensions – To transfer or not to transfer, that is the question?
Recent pension transfers I have been involved with include British Airways and BT, amongst others, and these have prompted me to consider their perceived “gold-plated” image and whether clients may be better off transferring out to a Self-Invested Pension Plan (SIPP), perhaps, or a Qualifying Recognised Overseas Pension Scheme (QROPS).
If you are contemplating your pension planning, ask your pension trustees to send you a Cash Equivalent Transfer Value (CETV) and you may be shocked by the size of the sum involved. The British Airways Scheme recently offered over £500,000 transfer value to a member whose pension entitlement would be £20833 at retirement. That’s 24 times the income.
The good points
Before you all leap into action and rush to transfer your pension into a SIPP or QROPS let’s look at what you may be giving up:
- Guaranteed income.
- Ongoing benefits for your spouse or even children.
- Certainty that the income is life-long.
- Index-linked income protecting you from inflation.
- Lack of Investment risk – whilst the assets in the pension scheme will be invested in commercial property, shares, bonds etc. The value of your benefits will not be affected by the volatility of these markets.
All “gold plated” benefits I’m sure you will agree.
But all that glitters is not necessarily gold!
The trouble is with today’s low interest rate, volatile times hamper the ability of Pension Scheme Trustees to ensure that your Final Salary Pension Scheme remains well funded.
Many schemes have entered the Pension Protection Fund due to being seriously under-funded. Household names like MG Rover, Asprey, Royal Worcester, Woolworths, Dyson, Thomson Directories, Kodak, Monarch and many hundreds more.
In all, over 230000 scheme members have been affected.
So, why transfer?
- Cash Equivalent Transfer Values are at historical highs
Today’s low interest environment in the UK means that Final Salary Schemes are obliged by the actuarial calculations used to offer significant lump to transfer.
- Flexibility of Investment Choice
Your company pension is being managed for all employees and trustees are bound by strict rules as to how and in what they can invest. This limits the potential up-side in favour of protecting benefits. Part of the reason why so many schemes are under-funded now.
With a QROPS or SIPP, you are in the driving seat as to where you invest and how much or how little risk you take.
- Flexibility of Income
With a Final Salary Scheme how and when your income is paid will be fixed and whist this is guaranteed, you have no flexibility in how your income is taken.
Following a pension transfer, increased flexibility means you can decide how you take income. You may like more income in the early years of retirement whilst you are active and less later. Transferring to a Flexible Access Drawdown arrangement within a QROPS or SIPP makes this possible.
- Removing the Tie to your Employer
Will your employer exist in 20-years? Look at Monarch, pilots had a Final Salary Pension which entered the Pension Protection Fund (PPF) in 2016 after being £660 million in deficit, and look where Monarch is today. We know of one pilot who was due to retire on £70000 guaranteed, whose pension was PPF capped at £26,572.
- Flexibility of Death Benefits
Typically, a Final Salary Scheme will pay a lump sum on death with possibly a residual pension of 50% for your spouse.
With a QROPS or SIPP you can pass the fund to the next generation (useful for inheritance tax planning).
- Access at an Earlier Age
If you are 55 or over you can access your SIPP or QROPS benefits as you wish. If you want to retire at 55 that is fine. With a Final Salary Scheme, you may have to wait until the scheme retirement age of 60 or 65.
Pensions are very complex and as always, professional Financial Advice is important. The UK Regulator will not permit transfers over £30,000 without specialist pension transfer advice. And it's worth noting also, that for a transfer below £100,000, the cost of transfer is likely to outweigh the benefits, so most advice firms would advise leaving well alone.