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Are you entitled to a free transfer offer from your final salary pension? Yes

Is the ability to leave 100% of your pension to whomever you want rather than your spouse or dependents getting a 50% income enough reason to transfer out of your final salary defined benefit pension scheme?

Has the fall in gilt yields post Brexit and the resulting increased Cash Equivalent Transfer Values for final salary pension schemes proved to be the right time to request your free CETV from your pension provider?

The death of final salary pensions (also known as Defined Benefit pensions) continues unabated. A recent government green paper stated that these types of pensions are generally unaffordable for companies.

This week BT announced it was considering closing its DB scheme to existing members. Discussions have begun with its trustees. Royal Mail is to follow a similar course of action, Tesco have closed theirs and everyone knows what happened with Philip Green and BHS’s pension. Hoover has done a deal with the Pension Protection Fund (the government fund that steps in when company schemes cannot meet their liabilities).

So what happens when your DB scheme is closed and you only have the option of a Defined Contribution pension? Is that a good or a bad thing?

For starters you won’t lose your DB pension. It will just be deferred meaning it won’t keep adding years, so think of it as on hold but it will still start paying a pension at your normal retirement date (often 65). While these pensions are good to have because they provide you with guaranteed income they are also far less flexible than some Defined Contribution pensions such as SIPPs.

4,262 of 5,794 (PPF figures) are underfunded and so logic dictates that there will continue to be generous Cash Equivalent Transfer Value offers made to members, with pension trustees often deeming it a preferable option to pay off a member now rather than having future liability. These CETV figures can be huge due to current low bond returns and therefore a large transfer amount having to be offered in order to match the rate of return you get from a DB pension. They also factor in costs like a 50% spouse’s pension even if you are not married. Sometimes it is as high as 30 to 40 times the pension amount you are projected to receive annually.

Anyone with a final salary pension can request one free CETV from their pension provider every year.

If this amount is then put into a SIPP, for example, you can take advantage of the flexible access options pensions freedom legislation introduced in 2015. You could, in theory, start living off the 25% tax free cash from age 55 and fund an early retirement, or use this to buy a child a flat or fund the unprofitable first couple of years starting a company. The underlying capital within the fund can remain invested and grow, and this can be taken in any amount and at any time. It is essentially a very liquid pot of money that can be used as the owner wants. That can be very desirable to any pension owner, it’s their money and the point of pension freedoms was to allow people to spend it how they see fit.

Pensions come with a wide variety of rules particular to each pension. They are very complicated. This is why the FCA require anyone thinking of transferring a DB pension to get advice from a pension transfer specialist (an adviser with an additional advanced pension qualification) in order to allow a person to make an informed decision, and to advise as to whether the CETV is fair value for the benefits being given up. Some clients may balk at giving 1-4% of their pension up as a transfer fee to an adviser, but an adviser has to accept liability for advice given and Professional Indemnity often requires the first £10,000 to be met by the financial adviser on any successful claim (there is no end date to the liability). A client fully understanding their decision to transfer is the main driver behind the FCA’s mandatory advice rule.

The FCA are understandably concerned that people are going to give up a secure source of income for one that is partially dependent on stock market performance. However, this has to be put into context, as multi asset risk appropriate funds are highly diversified around the world and constructed so that you get the upside of growth while getting a reduced downside. Non professionals might get scared when share prices drop but share prices in the 2 years post 2008 collapse bounced back very quickly (FTSE 100 went from 4000 to 6000 2009-11)

Possible reasons to transfer out of a final salary scheme and into a Defined Contribution Scheme?

  1. The Client is currently single and may remain so into retirement negating the need for a spouse’s pension
  2. The client is suffering from Impaired health (both Client and Spouse) that may lead to a reduction in longevity
  3. The client is over 55 and needs to clear a mortgage or significant debt to avoid financial hardship
  4. The client may need to fund long term care without any other options for themselves or their dependents.
  5. The clients existing final salary pension schemes financial position is not good and there is concern that it may fall into the PPF and leave the client unable to take flexible benefits in the future.
  6. The client has sufficient long term income from elsewhere to provide their financial needs throughout retirement and are looking to take advantage of the pension freedoms to take their income in a different shape to that offered by the defined benefit scheme.
  7. The client is considering or has decided to move abroad
  8. An enhanced transfer value has been offered
  9. The Critical yield on the TVAS is considered achievable when aligned with Clients ATR and long term retirement modeling projections
  10. The Death benefit calculation shows a significant increase in the lump sum value of funds available to the clients spouse and loved ones.
  11. The client is keen for the full value of the transferred fund to be available to their spouse and family upon death to take as they wish and in a tax efficient manner.
  12. The value of the client’s combined pension funds may take them over the lifetime allowance limit and they may wish to strategically plan future pension contributions and withdrawals.

If you would like to discuss with a pension transfer specialist for free whether transferring your final salary is right for you, please contact | 01223 926270

While we keep information on the website as up to date and as accurate as possible, the information on this website does not form part of our advice process. Cambridge Pensions Ltd cannot accept any liability for any decisions made by a client or member of the general public based on any information contained on this website. The value of your investments can go down as well as up and you may get back less than has been paid in.

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