Final Salary Pensions – Stick or Twist?
Until recently, the ‘best bet’ with a final salary pension was to leave it well alone. However, a combination of factors means that the old rules no longer apply. So how should you play your cards when it comes to a potential pension transfer?
These days, a ‘final salary’ pension is a rare and splendid thing. Even so, there’s still an estimated 6.8 million Britons¹ with ‘deferred’ final salary pensions that could now be ripe for transfer.
The old rules of engagement
Final salary pensions got the name because they pay a pension based on a percentage of your salary. Thanks to their generosity, until now it was generally best not to transfer from a final salary to a personal pension where you need to shoulder the investment risk yourself.
But two recent developments have turned conventional wisdom on its head.
The first is the record low yields on UK government gilts, which has pushed the cost of providing a final salary pension to new highs. As a result, the transfer values offered as an alternative to taking your pension have also hit new all-time highs. In some cases, they’re over 200% higher than they were just a few years ago.
Indeed, some schemes are now offering multiples of 50 or more, which means that a modest £10,000 p/a pension can now be worth in excess of £500,000 when transferred.
Freedom of choice
The other factor behind the current boom in final salary transfers is the arrival of the new ‘pension freedoms’. Now, anyone over 55 can access their personal pension whenever they like and take whatever income or cash lump sums they choose (subject to the tax rules).
Critically, the new rules also abolished the 55% ‘death tax’ on pensions, which suddenly made them one of the most tax-efficient ways in which to pass wealth to the next generation.
This is key as it means that the simple act of transferring to a personal pension now transforms a final salary pension from something that ends when you die into a major financial asset that can be managed and then passed on to your loved ones.
Transferring also enables you to keep your pension pot invested for what might be 30 years of retirement as well as presenting the opportunity to reduce your tax bill in retirement.
Drawing conclusions
Because transfers are highly nuanced, it’s also now a legal requirement to seek professional financial advice (which carries a fee) on any pension transfer worth over £30,000.
Before you find an adviser, a good first step is to calculate just how generous your current transfer value might be. That’s why Drewberry built this calculator as a free online tool that does the heavy lifting for you.
Whether a pension transfer is right for you will depend on your circumstances, but with record transfer values and new pension freedoms on offer, it makes good sense to find out.
¹Royal London, data correct as at March 2015. Sources: Purple Book (December) 2015 & LGPS Annual Report 2015.
Neil Adams is Head of Pension Planning
at Drewberry Wealth Management
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