Final Salary Pension Transfer Advice

Final Salary pensions are commonly found in both the public and private sector. Traditionally, they were common within industries such as oil, gas, chemicals and engineering. However, in the modern world, they are more common in public sector roles such as teachers, NHS workers, emergency services, the armed forces and many others.

There are many members in a Final Salary pension scheme, generally speaking, each member pays a percentage to the scheme. Some Final Salary schemes don’t request member contributions, but these are less common. Your employer then subsidises — sometimes paying as much as three times the amount you put in or more.

If you’ve come from one of the industries mentioned in the previous question, or have worked in the public sector, there’s a good chance you have a Final Salary pension. Your employer, pension provider or an independent financial adviser such as Joslin Rhodes will be able to clear up which scheme you’re in.

Generally speaking, they’re very good as they provide a secure income for life which is risk-free. You don’t need to manage anything, and they generally increase in value every year typically in line with inflation. However, like any pension scheme, it has its advantages and disadvantages.

Advantages

• Guaranteed – payments continue throughout your life and are protected by the state, or the Pension Protection Fund (PPF).
• Simple – you know how much you’re going to get every month, like a wage.
• Subsidised – you’ll likely get a lot more back than you paid in.

Disadvantages

• Inflexible– once you’ve set what you’re getting you can’t change this and take more or less at a later date.
• Hard-wired– if it comes with spousal benefits you can’t turn these off, even if you don’t have a spouse/partner.
• Dies with you or your spouse if a spousal benefit is included– when you die the payments stop so generally, no money is passed to children. However, if you’ve children, typically under age 18, then benefits can be payable to children upon the member’s death.

Transferring from your Final Salary pension can give you more options, but it’s not for everyone. Just because a colleague or family member has done it, doesn’t mean it’s right for you.

You should look to speak with a financial adviser for the best possible advice on whether transferring or remaining in the scheme is the correct decision for you.

Generally speaking, the default decision is that remaining in the scheme is most appropriate.

Looking for the Pension Transfer Gold Standard can help you recognise good practice and, ethical and professional standards when looking for pension transfer advice. It’s essentially a series of nine principles that set out a robust and comprehensive code of practice for advising on Defined Benefit/Final Salary pensions above standard industry regulations set by the UK financial services regulator, the Financial Conduct Authority (FCA).

A common reason for looking to take advice about your DB scheme is the possibility of greater flexibility. If you’ve got a Final Salary pension, but like the sound of this, in most cases, you can opt to transfer it to a Defined Contribution (DC) scheme, which gives you the option to move your pension into drawdown.

However, giving up a secure income requires careful consideration.

Like everything in life, too much freedom isn’t always a good thing. If you use that flexibility to overspend, your pot could run out quicker than you anticipate. Plus, there are investment risks and also tax implications should you take large amounts from a drawdown pension. There are also investment charges and advice charges that aren’t payable in a DB scheme.

Another common reason for transferring to access drawdown is it also allows for a death lump sum.

Under current rules, if you die before you’re 75, your pot will be passed on tax-free. If you’re over 75, it can be passed on as a lump sum that may be subject to tax at the heirs’ personal income tax rate.

Suppose you’re already in retirement when you die. In that case, your pension will be passed on to your spouse, civil partner or any other dependent, but only if your pension includes spousal benefits. However, it’ll generally be reduced by as much as 50%.

If you pass away before you take your pension, many schemes will pay out a lump sum, which can be tax-free if you die before you’re 75. Your spouse, partner or other dependants can also potentially receive a taxable ‘survivor’s pension.’

Enough for what? How do you want YOUR retirement to look?

Before you think about taking advice on your pension options — or even thinking about your scheme — you need to think about your retirement lifestyle.

Knowing what you’ll be doing helps answer whether you’ve enough or not.