Our step-by-step Advice Process for reviewing Defined Benefit or Final Salary pensions is designed to ensure that anyone considering transferring their Final Salary Pension has received specialist Independent Financial Advice before deciding whether or not to transfer, but before we get into that, let’s start with the basics.
It’s extremely important to understand that transferring a Defined Benefit or Final Salary Pension carries significant risks. Here is an extract from the Financial Conduct Authority's statement, dated 24th January 2017:
"Transferring pension benefits is usually irreversible. The merits or otherwise of the transfer may only become apparent years into the future. So, it is particularly important that firms advising on pension transfers ensure that their clients fully understand the implications of a proposed transfer before deciding whether or not to proceed."
Please click here for our free Guide to Final Salary Pension Transfers (PDF), which includes important information about the risks involved.
Unlike Defined Contribution (DC) Pensions, which carry no guarantees, Defined Benefit (DB) or Final Salary (FS) Pensions provide a guaranteed pension income for life, which is often linked to inflation. The amount that you receive from a Final Salary Pension will, in most cases, be based on the length of time that you were a member of the scheme and your Pensionable Salary. The elements of your earnings that are included in your Pensionable Salary will vary from scheme to scheme.
Most Final Salary Pensions have the option to transfer to another pension in your own name, rather than being controlled by the previous scheme. Your Final Salary Pension is based upon the Defined Benefits, so the Scheme Administrator would need to calculate a Cash-Equivalent Transfer Value (CETV). This is the amount of money that you can transfer, which is designed to allow you to buy an equivalent pension from another provider in your own name. However, it is not quite this simple.
In the current climate, CETVs can be in the region of 30x the guaranteed annual pension income being given up. For example, a Final Salary Pension quoting £40,000 pa could have a CETV of £1.2m or more (or less of course). The multiple that you get can vary significantly from scheme to scheme and the CETV will also depend on a multitude of assumptions.
A CETV is usually guaranteed for up to 3 months, after which, it would have to be recalculated. This is due to the various assumptions that are used to calculate a CETV. It is common practice for Scheme Administrators to provide you with one CETV in each calendar year at no charge. However, if you want to obtain a second CETV within any 12-month period, most Scheme Administrators apply a one-off charge in the region of £250 plus VAT.
The decision whether to transfer or not is very complex and depends on a whole host of factors, most of which are related to your personal circumstances and attitudes to various factors. This means that, once a CETV has been provided, you have up to 3 months to obtain advice and consider the recommendations made.
3 months may sound like a long time, but it can be very limited if you are to have sufficient time to fully explore your options and consider any professional advice that you receive. Therefore, the sooner you instruct an Independent Financial Adviser, the better. If this process takes more than 3 months, the deadline for the CETV has usually passed and a new CETV would need to be requested, which may incur a charge and could be higher or lower than the original CETV, which could subsequently affect the advice given and/or your decision to transfer.
Whilst Final Salary Pension transfers carry a multitude of risks, they can also result in the following advantages:
• Increased control and/or flexibility, for example, it is possible to vary what you take out of your pension plan between zero and the whole fund (provided you are happy to pay the tax)
• You can take out your income and/or Tax-Free Cash in stages to control tax and/or to match your spending
• The ability to take more income between retiring and your State Pension starting, to "bridge the income-gap" in the years before your State Pension starts
• The opportunity to spend more now and less in later life, to enjoy more income in the early years of retirement when you are healthy and fit enough to do so
• Potentially more Tax-Free Cash
• Sometimes greater Death Benefits with greater flexibility of how and who these will be paid to, for example;
• Ability to pass money down the generations and preserve your hard-earned money
• Increased value of your Estate to pass on to your family
• Ability to have Death Benefits held separately from your own or your family's assets, in order to avoid issues with potential divorce, children divorcing or simply going off the rails
• Tax planning opportunities
If you would like to discuss your Final Salary Pension or arrange a meeting with us, please call us on 01344 778990 or message us here.
Financial Planning Partners Ltd
19 Wellington Business Park
Tel: 01344 778990
FPP are committed to dealing with clients and prospective clients in a professional and ethical manner and to that end adhere to the principals laid out in the CII Code of Ethics, a copy of which is available on request.
Retired over six years ago. Colvin was a senior executive with a background in international banking and UK financial services. Now he enjoys travel, playing golf and is heavily involved in the local Lifeboat Association. Occasionally he does some small business consultancy to keep his hand in.