The new pension rules that came into effect just over a year ago mean it could now sometimes make sense to ditch your final salary pension.
With the April 2015 pension freedoms, there could now be more reasons to transfer from a private defined benefit scheme to a defined contribution pension. Until this point, most advisers and analysts would have stated clearly that it hardly ever makes sense to take a transfer value of a lump sum from a final salary scheme and invest it in a SIPP or personal pension plan, possibly losing valuable benefits in the process.
Final salary or ‘defined benefit’ pension schemes have always been seen as the ‘gold standard’ of the pensions world. Your employer promises you a percentage of your earnings as a pension, providing you with a guaranteed income for life. You contribute and the company has to pay into the scheme whatever it takes to meet its promise.
However, under the new rules, there are now some occasions when transferring out of a final salary scheme could be useful.
For example, for those who are ill and have a shortened life expectancy, the income for life guarantee from a final salary pension is not as vital as it is for people who want their index-linked pension to still be paying out 30 years later. Switching to a freestanding pension scheme would provide more flexibility, with access to cash if required for medical care, as well as cash plus the possibility of a reasonable income for any surviving spouse or partner.
Others may want to spend more at the start of their retirement, on top of their tax-free lump sum, reining back later. They could find the rules of their final salary pension too restrictive to allow this. In some cases, your final salary scheme may offer you a financial incentive to transfer out of the scheme, with an enhancement to the ‘cash equivalent transfer value’.
Then there are the tax benefits under the new pension rules. With a defined benefits scheme, your final salary pension dies with you – there are no death benefits. However, if you transfer to a freestanding scheme, all the capital remaining in it on your death will in most cases pass free of inheritance tax to your designated beneficiaries.
There are other reasons and circumstances why you may wish to consider transferring from a defined benefits scheme, but you should not do so lightly and certainly not without first getting professional financial advice.
The process of evaluating final salary pension transfers is complicated. The terms of each scheme differ, as do the value of their guarantees and you need to carefully assess your own circumstances, needs and tax position.
To find out whether a pension transfer make sense for you, contact Kellands.