Stuart Randall our Chartered Financial Planner (Pension Specialist) at Cherwell Financial Services Ltd, discusses why many people are now considering opting to transfer out of their defined benefit pension schemes and offers some potential reasons on deciding whether a pension transfer is right for you.
Defined benefit pensions (or final salary pensions) have become the subject of conversation since the changes to pension flexibility, along with the publicised pension deficits of a number of high profile companies such as British Airways and the now closed BHS. Whilst they were once considered to be ‘best of all’ pension schemes, an increasing number of members of these pensions are opting to transfer out, giving up a monthly income that rises with inflation, in favour of a transfer of the benefits as a cash equivalent lump sum to a Personal Pension, to draw upon and use or potentially leave a legacy.
So, why would you consider a pension transfer?
During the global financial crisis, which saw banks from around the world fail and the money markets freeze up, some of the central banks of world, America, Europe, U.K. started a program of ‘quantitative easing’ ( printing money) the impact of this along with reductions in interest rates brought record low government GILT yields. Pension trustees of final salary pension schemes have been having to use more of their scheme balances to provide for the incomes that were previously agreed, leading to larger and larger pension deficits so as part of pension’s freedom they have had to having to offer extremely high pension transfer values. In some instances, the cash equivalent transfer values from a defined benefit pension can be up to 60 times more than the preserved pension, although more commonly this is around 20 times, making transferring out an attractive option for some individuals.
The Bank of England has recently increased interest rates by 0.25% to 0.5% as such as rates start to rise we are likely to see a drop in pension transfer values. This means that it is likely to be a limited window to take advantage of these high cash lump sums, although for some individuals this may still remain suitable even with higher interest rates. Therefore, if you are considering transferring out of a defined benefit pension, you should seek financial advice sooner rather than later.
A major reason to consider transferring your pension out of a defined benefit scheme is that the benefits can be passed on to any beneficiary you choose, e.g. Children or grandchildren, not just your surviving spouse. And, if you die before you are 75 it will be tax free. Whenever you die the pension will always be outside your estate for inheritance tax.
Many of our clients who are considering transfers are doing so to facilitate either early retirement or ensuring that their assets pass on to their family “bloodline planning”, believing they would otherwise have to continue working to the new higher state pension ages or accept that the money would not be there to pass on to the next generation. Their existing final salary pensions will offer a fixed income that usually starts without penalty from age 65(some schemes may be different), however with a ‘drawdown’ pension the client can draw these funds from age 55 currently choose the level of income they require and this can be moved up and down as they wish knowing that the pot of money is there to provide an income for life, with any funds remaining upon death being able to pass on to the next generation.
Is a pension transfer the right choice for you?
Here at Cherwell Financial Services Ltd we understand that transferring out of a defined benefit pension is a big decision and helping you understand what to do for the best is what Stuart our Chartered Financial Planner is an expert at. That is why we consider your personal circumstances and think about what you require from your retirement benefits.
Pension transfers are normally irreversible (as you can change your mind after transferring), so ensuring whether or not it is suitable depends on your circumstances and whether the loss of promised pension benefits and the investment risk associated with a drawdown arrangement is in your best interest and not purely based on the value of the transferable benefits and rate of return.
As an authorised chartered financial adviser in pension transfers advice Stuart will be able to help you conduct a careful assessment of your situation to determine the best course of action and if suitable he will be able to recommend a solution.
For a discussion regarding pension transfer please contact one of our team at Cherwell Financial Services Ltd who will be happy to help on 01295 698600.