Final Salary Pensions or Defined Benefit plans have had the historic view that “it’s always wrong to come out of a defined benefit pension scheme”. This is no longer the case and to redress the balance here are six good reasons to consider the transfer option.
- A final salary benefit can be a significant family financial asset, a transfer capitalises and gives you control of this asset, which can now be passed down through the generations without inheritance tax.
- Transfer values are so high at present that a good deal of the investment risk associated with transfers can be removed. On most transfer values a 2% real investment return, after fees and inflation, will provide the same level of pension plus potential for residual value to be passed on.
- Transfers offer you complete flexibility over when and how much you draw on your pension account and are in complete contrast to a fixed monthly pension income. It’s inconceivable that 60 year old retiring now with the prospect of potentially 30 years or more of retirement will have the same cash needs year in year out until they die.
- This flexibility extends to taking the cash as early as age 55 and deferring the taxed pension until it’s needed. The potential uses of this early cash sum are extensive, from paying down mortgages early, to investing in ISAs to generate tax free income, or helping the next generation on to the property ladder.
- A final salary transfer takes away the life expectancy gamble implicit in a lifetime income. It capitalises the benefit once and for all based on normal life expectancy, irrespective of your personal health now and in the future.
- With flexibility comes the ability to be tax efficient. In virtually all the cases where we have recommended a transfer there has been the ability to save tax as compared to the rigid final salary pension benefits. These can include:
- A higher tax free cash sum following the transfer
- The ability to limit pension income to specific income tax bands
- The opportunity to defer and minimise the impact of lifetime allowance (LTA) penalty tax charges
A final salary transfer allows you to swap a future pension entitlement in a final salary, or defined pension scheme for a cash sum that must in the first instance be put into a registered, or HMRC recognised pension scheme. The cash sum value is the ‘cash equivalent ’ of the pension income you leave behind, or put another way the amount of money today that would be notionally set aside in the scheme to meet your specific pension liabilities as they fall due.
This article is for information purposes only and should not be taken as advice. Also seek Independent Financial Adviser before making a decision on your pension benefits.