We have put together some examples below where members have considered their options to see if final salary pension transfer was appropriate for them. These are examples of instances where individuals may consider transfer based on various scenarios.
The benefits from a final salary scheme are determined by the scheme rules. They may offer a degree of flexibility such as an option to give up some pension for a lump sum, but largely the benefits will have to be taken on a prescribed basis. A typical final salary scheme will pay an index linked pension with a 50% spouse’s pension and a five year guarantee. This may be suitable for some, but the chances are that some part of this benefit structure will not be entirely appropriate for some of the members. If a final salary pension is taken the decision is irreversible so it is worthwhile considering options before benefits are taken.
Transferring into a private plan is also an irreversible decision and it is by no means appropriate for everyone. You will note that in most scenarios below that remaining in the scheme is often the most suitable route.
Isabel has built up a final salary pension with a normal retirement age of 60. She desperately wants to retire but the pension will not provide enough for her to live on. She had resigned herself to working until age 66 when her state pension starts. She was deeply upset about this as she wants to spend as much time as possible with her grandchildren. She spoke with one of our advisers who discussed the new rules with her. Isabel decided to do a final salary pension transfer and take a series of lump sums from her pension which will allow her to retire now. At age 66 her state pension will meet her outgoings. Whilst her final salary pension will be totally exhausted at age 66 Isabel is unconcerned as she has achieved her aim of immediate retirement.
Peter had a final salary pension and investigated the option of transferring this with a view to cashing in his pension over a very short period of time. After discussing his options with us he realised the value of his final salary pension. This would provide him with a secure index linked pension throughout his retirement and he realised that transfer was not suitable for him.
Phoebe has recently reached age 55, she has a reasonable income, but has built up a credit card debt that she cannot pay off. Each month she is making the minimum payment, but the debt is increasing. She has no way of settling this debt and discusses a final salary scheme she has with one of our advisers. On discussion it is clear that she will have guaranteed income in retirement to meet her outgoings. Phoebe decides to transfer her final salary pension and settle the debt. She is not concerned about the future loss of income as she has sufficient guaranteed income in retirement and due to the relatively small size of the final salary pension income she did not feel that she would notice the loss of this. In contrast, settling the debt has lifted a huge weight from her mind and gives her an immediate increase in her income
Erin had a large pension in payment and was also in receipt of her state pension, she had enough guaranteed income in retirement to provide her with lifelong security. She also had a relatively small final salary pension that would pay her an income that she admitted, would go unnoticed by her and have no impact upon her lifestyle. On discussion with one of our advisers, she transferred her final salary pension and took the proceeds of this as a one off lump sum and treated herself to a holiday of a lifetime.
George approached us due to the level of debt he had built up. He is making the minimum payments to his creditors, but the debt is increasing on a monthly basis. He wished to use his final salary pension to settle his debt. On discussion this would only solve his problems for a short time as it would leave an income shortfall in retirement. George was able to agree a repayment plan with his creditors that was affordable and sustainable. This left his pension scheme intact to provide an essential retirement income.
Alex has recently been diagnosed with a serious illness, his doctors have warned him that his life expectancy is around 5 years. He has spoken with his scheme administrators and they have advised that there would be no special terms for him if he took the scheme pension.
Alex spoke with one of our advisers who arranged to transfer his final salary pension. Alex is now taking a series of lump sums and income from his pension to meet his requirements. On his death the remaining fund will pass to his beneficiaries. Had he took the scheme pension, this would have paid a reduced spouse’s pension or ceased.
Stuart has a substantial final salary pension. He will depend on the income from this but he is very concerned about the death benefits from the scheme. He is aware that if he takes the pension from the scheme that it will only pay in full for the first 5 years, after this it will fall by 50% if his wife is still alive, if not his children will receive nothing further. Stuart would like to pass the benefits on to his children if possible. His health is reasonable, but both his parents died at an early age and he does not want his family to miss out on what could be a large inheritance. Stuart spoke with one of our advisers and obtained a transfer value. We discussed in detail the implications of transfer and the risks involved and Steve decided to transfer and take an income from his pension leaving his fund invested. Whilst he has lost his guarantees, he has the potential of leaving some of the benefit to his family.
Claire had a serious illness and approached us with a view to transferring as she had heard that the death benefits were superior on transfer. After discussing her life expectancy and requirements with us she was advised to take benefits from the scheme. The final salary scheme paid a significant spouse’s pension and based on her life expectancy, attitude to risk and her family’s requirements in the event of her death, remaining in the scheme was the most appropriate course of action.
Dave had a final salary pension. He was very cautious and wanted a guaranteed income in retirement. He had never thought that a transfer would be suitable for him, but discussed his requirements with one of our advisers. Dave and his wife had sufficient income from the final salary pension and state pensions, but there was little left for holidays and discretionary expenditure.
Dave transferred his final salary pension and purchased a level annuity. This provided him with income security but gave him a higher initial income. This allowed him and his wife to enjoy holidays in the early years of his retirement. He accepted that his spending power would not be maintained, but he expected that he would slow down as he got older and not require as much income.
Glenn had a substantial final salary pension. The guaranteed income from this was very important to him and his wife. His wife had never worked and had no pension of her own. They would have the capacity to enjoy a nice lifestyle with the pension, but Glenn was extremely concerned that in the event of his death, his wife would only receive 50% of his pension. He was aware that this would not cover their regular bills.
Glenn spoke with one of our advisers and transferred his final salary pension to an annuity that provided a 100% spouse’s pension. This provided a lower income than the scheme would have, but both Glenn and his wife were secure in the knowledge that their lifestyle could be maintained in the event of either death.
Ian gave consideration to restructuring his final salary benefits. He was single and his scheme contained a spouse’s pension from which he would receive no value. We worked with Ian to see if he could achieve a better pension on a single life basis, but the transfer value was not able to provide him with the same level of pension as that provided by the scheme. As a result of this, he took pension benefits directly from the scheme.
Antonia has not been in the best of health in recent years, she is overweight and smokes. She has a final salary pension that is due to come into payment, but this will only pay a pension based on her salary and service, it takes no account of her health issues and her smoker status. She speaks with one of our advisers who is able to obtain an enhanced annuity illustration. This takes into account that she has a diminished life expectancy and provides a pension that is higher than the scheme pension.
Oscar has several health issues and has retired early from work. He uses our service to investigate whether he could achieve a higher pension from an enhanced annuity. Whilst Oscar has various illnesses, and he is eligible for an enhanced annuity, the pension available on the open market is considerably lower than the final salary pension. He decided to take a pension directly from the scheme.
Fred has built up a very significant final salary pension. He has no current concerns about the solvency of the scheme sponsor, but as the pension could be in payment for more than 20 years he wants to look to protect himself should his former employer suffer financial difficulties. He is aware of the Pension Protection Fund and that there is an income cap. If his employer were to suffer an insolvency event and his scheme enter the PPF, his income would fall substantially. On discussion with one of our advisers, Fred decided to transfer and take income, whilst leaving his fund invested.
Jessica has a deferred final salary pension with a previous employer. She has been reading stories in her local paper about this employer and she is concerned about their future. She uses our service to see what action she could take to protect her pension. On discussion she was reassured with the level of protection provided by the Pension Protection Fund (PPF) if her former employer suffered an insolvency event. She was very cautious and did not wish to take on the investment risk and so was advised to remain in the scheme.
Alan is in his mid 40s and has 10 years in a final salary scheme. He has started a business which is doing well, but he is looking to expand. He wants to purchase a commercial property in order to help the business grow, but is unable to secure any borrowing to do this. He discusses his options with one of our advisers and after considering the mathematical and financial considerations, he decides to transfer his final salary pension into a self invested personal pension (SIPP) and purchase a commercial property. He is aware that he is taking on a risk in doing this and that he has lost the guarantees associated with a final salary pension.
Julie had an interest in ‘niche’ investments and approached us with a view to transferring her final salary pension to access these investments. We completed a review on Julie’s circumstances, it was clear that she would depend on the final salary pension and could not afford to take on the investment risk, particularly in view of the areas that she was looking to invest in. We advised Julie to stay in the final salary scheme.
Justin has obtained a transfer value from his scheme, he is too young to take benefits but is pleasantly surprised by the transfer value. He discusses transfer with one of our advisers. Justin is a relatively experienced investor and gives consideration to the level of return required to match the scheme pension. He is confident that this return can be achieved and wishes to take the risk that he can outstrip the benefits provided by the scheme. After consideration of the factors, he decides to transfer.
Chris was interested in transferring his final salary pension, he was comfortable with investment risk and used our service to explore this option. We assessed his transfer value and calculated that the rate of return he would need to match the scheme benefits. We discussed this with him and felt that whilst the rate was achievable, it was too high to proceed. There was no logical reason to take on the risk of transfer. As a result, Chris decided to stay in the scheme.
Disclaimer: Final Salary Pensions are suitable for the vast majority of members. Transferring from a final salary pension scheme is an irreversible decision and it could have a detrimental effect on your retirement planning. The detail on this website is for information purposes only and is not to be taken as a personal recommendation. Before taking any action, you should take financial advice from a suitably qualified independent financial adviser. Any potential advantages of transferring from a defined benefit scheme to a defined contribution scheme are often outweighed by the costs, risks and loss of benefits involved.
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