Who Should Consider the Transfer Option?
There are many reasons to consider the transfer option. While transferring may not be for you, knowing your options is always the best way to make an informed decision.
Please note if any of these scenarios are relevant to you, this does not necessarily make transfer suitable. It may however be worth reviewing your scheme benefits to see if they are appropriate to your circumstances.
You Have No Spouse / Partner
If you are single, then it could be worth considering the transfer option. One of the benefits of a final salary pension is that a dependant’s pension is payable. If you have no qualifying partner, you will receive no benefit from the survivor’s pension. You may be able to secure a higher pension in your own name, or consider an option where the death benefits are brought in line with your requirements such as to pass on to your children.
You Are in Poor Health
If you are in poor health that reduces your life expectancy, then a review of your transfer value is appropriate. The transfer value is based on you living in line with average life expectancy and you may be able to achieve a higher pension that takes account of your illness. If you have a very short life expectancy, you may want the option to spend your transfer value over a short period of time, or pass the full fund to family members.
If you are not in good health at the time of the transfer and should die within the 2 years following the transfer, it is possible that a value could be allocated to the pension plan for inheritance tax purposes and included in your estate.
You Would Like Increased Flexibility
With a transfer, you have more flexibility with what you can do with your pension. You can take flexible income, take higher income in some years and reduce it in others. If the structure of the scheme income payment does not suit you, then exploring the transfer option may benefit you. An example of this would be if you want higher income in the early years of retirement with a view to reducing this later in life such as when your state pension starts.
You Want to be More Tax Efficient
On transfer you can control the timing and amount of your income. You may benefit from this if you wish to avoid paying higher rate tax for example. If you wish to have control of your income, it may be suitable to review your circumstances.
Your Company is in Poor Financial Health
If your employer / former employer suffers an insolvency event, your pension could be reduced. This could be considerable if you have a significant pension as a cap applies. If you are concerned about the long term future of the scheme sponsor, you may benefit from a review of your final salary pension.
Why Should You Consider Staying in the Final Salary Scheme?
The final salary pension is suitable for the vast majority of scheme members. It will pay you an index linked income (usually) throughout retirement where you are not responsible for the investment risk.
The sections below provide more detail about why you should stay in a Final Salary Pension Scheme.
You May not be Able to Afford Your Bills
A final salary pension will pay you an income until you die. If you take the transfer option, you take on the investment risk. If things don’t work out as expected, you may not be able to afford to maintain your lifestyle and you will have very little capacity to repair this situation.
You Have No Other Assets
For most pensioners, their pension is their main source of a secure income and funds their basic needs. If you do not have any other assets that could provide this income, then transferring your pension is a risky move. This is because if your investments go wrong for any reason, you would have nothing left to fall back on.
If You Are Married
One of the benefits of a final salary scheme is that it will typically continue to pay a proportion of your pension to your spouse / qualifying partner after you have passed away. If you have been the main earner in your family, this is particularly valuable to those you leave behind.
If the Transfer Value Offered is Low
Some transfer values represent a good deal on a pure mathematical basis, but you need to check your own transfer value, as on review, it may not represent good value for you.
Transferring a Final Salary Pension is Irreversible
If you decide to transfer your pension then it is very unlikely that you will be able to transfer back into the final salary scheme. This decision is usually irreversible.
In some schemes you can give up (or commute) part of your pension for a tax free Pension Commencement Lump Sum (PCLS) The Commutation Factor is the rate that you convert this pension. For example, with a scheme that has a commutation factor of 20, each £1 of pension you give up, will provide you with a Lump Sum of £20.
The higher the commutation factor, the greater the lump sum you will receive. Commutation factors typically reduce with age.