Did you know that in the last year, 80,000 people have given up their “final salary” pension entitlements? Understandably, this has prompted concern over whether people are aware of the facts before swapping their final salary pension for cash.
Final salary pensions pay a guaranteed income for life when a person retires. This is based on a percentage of the final salary multiplied by the number of years the person has been in the scheme. The downside to these schemes is the income is restricted and highly controlled, and it is not possible for a person to transfer any of the pension to anyone other than a partner.
In some cases, it may be an appropriate move for savers to transfer their final salary pension, but it is also extremely important to take four things into consideration before making a decision:
Make sure you are looking at the right figures
When swapping a final salary scheme, it’s important to first of all request a “cash equivalent transfer value, which will define how much the scheme will give you in exchange.
This value can be confusing as schemes may provide up to four of them, including the annual income at the time you left the scheme, a projected income, a discounted income and an income that is revalued to match the current time.
Here, it’s hugely important to look at the right number in terms of the value of your pension, to avoid the misunderstanding that the offer is more generous than it actually is.
Take note of whether the time is right
The nearer to retirement, the larger the transfer value is expected to be. However, it is very difficult to predict a scheme’s future funding position. This, along with the performance of investments, may be one reason why a scheme may offer a different amount than initially expected.
If possible, it would be a great idea to enquire whether your scheme offers a partial transfer, retaining some guaranteed income yet allowing part of the pension to still be transferred.
It’s also important to consider whether you’re confident that the future government will refrain from changing the rules on defined contribution pensions.
Consider your current situation
When transferring your pension scheme, it’s important to consider your family situation. Many final salary schemes offer a pension for a spouse, which will pay around half of the pension to a partner. However, many schemes are not flexible with this benefit, meaning this may still be the case even if a member is single.
If you are a single person, or if your partner does not need the extra income, it may be a good idea to transfer out of the scheme.
Pensions are limited to a £1m lifetime cap, with any amounts exceeding this subject to a fee when a person takes in an income. This rule is different for final salary pensions, as the annual pension is multiplied by 20 when tested against this lifetime allowance.
When considering transferring from your final salary pension scheme, it’s important to ensure that you don’t breach the £1m limit.
If you’re looking to swap your final salary pension for cash, talk to our financial advice team. Please call on 01926 492406 or email us at email@example.com to make an appointment.