Transferring final salary pensions: the good, the bad & the ugly
There are varying opinions on whether this is really for the good or bad. My colleague, James Biggs, has previously written about the very valid reasons employees might want to consider such a transfer. Here’s a quick reminder of some of those reasons:
The good
- pass the whole fund to your family on death (final salary benefits typically die with you, or are at best lousy if you die early)
- no paying for a spouse’s pension if you’re single
- flexibility to withdraw money as you need to, either to change income levels, or take lump sums from time to time
- control the amount you take as a pension to suit your tax rate
- if you transfer to a personal pension, you get 25% as tax-free cash and can take this and your pension at any time from age 55 – they don’t have to be taken together
- if the final salary scheme goes bust (this is very unlikely, but still a possibility as many of them are in deficit), then you’ve got your money out
The Pensions Protection Fund (PPF) is the ‘lifeboat’ for final salary schemes. It currently limits cover to 90% of the first £33,600 per annum of pension income, but this fund is under stress with all the claims.
Let us also now consider the very ugly consequences if it all goes horribly wrong…
The bad
- you are giving up the guarantee that your retirement income will never run out
- you are often giving up a guaranteed spouse’s or dependent’s pension
- you may be giving up an inflation-linked or increasing pension
- if you withdraw too much, you could pay excessive tax
The ugly
- the markets crash
- you (or your adviser) manages your investments really poorly
- you spend too much too quickly (boats, fast cars, holidays)
- you live much longer than you expect or need long-term care
All of these examples mean you run out of money early… now that’s really ugly!
So, what’s the answer?
Any employers who are providing their employees with access to independent financial advice around their final salary benefits, should make sure their chosen advisers are suitably experienced in this specific area. They need to have a strong pensions background and preferably have been extensively involved with final salary schemes for employers.
Will advisers one day be seen as the outlaws who were responsible for robbing these poor unsuspecting people of their right to a stable and predictable retirement? We’ve seen the regulator move the goalposts before (with the benefit of hindsight). This does worry many firms offering final salary transfer advice. So don’t expect this kind of advice to come cheap; there are simply a hell of a lot of costs and risks associated with providing it.
Transferring could be a great decision for many people. But for others, for goodness sake stay put and whatever you do, watch out for those outlaws!
Rhys Francis is CEO of Lorica.
This article was provided by Lorica.
In partnership with Lorica Workplace
Lorica has one simple aim: to help people develop a healthy relationship with money.