Final Salary pensions are often seen as gold-plated and an attractive way to fund retirement. However, a number of people are choosing to transfer out of these pensions in favour of greater flexibility. When you look at transfer values, it can be a tempting offer. However, it is important to understand the pros and cons before proceeding.
Following recent media coverage suggesting that some retirees may have chosen to transfer out when it was not the right choice for them, the number of people leaving Final Salary schemes has decreased, according to the Office of National Statistics. When compared to 2017, the number of people transferring out fell by 10.5% last year. However, the amount transferred out was still a significant sum at £33 billion.
The transfer value offered can be as much as 30 or 40 times your projected annual income in retirement, making it an attractive prospect. But on the other side of this argument, you need to look at what you will be giving up too.
The basics of a Final Salary transfer
A Final Salary pension delivers a guaranteed income for life, typically linked to inflation to maintain your spending power. How the amount you receive at retirement is calculated should be defined when you become a member, usually, it is based on how many years you are a member and either your final salary or career average. Many Final Salary pension schemes also come with additional benefits, which may be valuable to you, such as a pension for your spouse or dependents.
If you decide to investigate transferring out of a Final Salary pension, the first step is to contact the scheme for a Cash Equivalent Transfer Value (CETV). This is the amount you would receive should you decide to transfer out of the scheme. This money must be transferred into another pension product, such as a Personal Pension or a Self-Invested Personal Pension (SIPP).
While alternative pensions usually offer greater flexibility in the way you access the money, the income delivered is not guaranteed. The only way to create a guaranteed retirement income from these pots of cash is to purchase an Annuity, which would deliver an income likely to be inferior to a Final Salary pension.
Is transferring out of a Final Salary pension the right choice?
There is no accurate way to answer the above question without taking the time to fully understand your situation. Whether your lifestyle in retirement could be improved by leaving a Final Salary pension is dependent on a whole range of different areas, from your health through to other assets.
The Financial Conduct Authority (FCA) takes the view that, for the majority of people, giving up a guaranteed income for life is not in their best interests. As a result, it is important to consider why you want to leave a Final Salary pension scheme and how you will create an income that will support you for the rest of your life. It should not be a quick decision; it is one that can not be reversed and will have an impact on your income throughout retirement.
So, what should you take into consideration? Among the factors to think about are:
Life expectancy compared to CETV: With a Final Salary pension, you do not need to worry about how long your savings will last for as the income delivered is payable until you die. If, however, you transfer out, you will need to consider life expectancy. Would your CETV be enough to fund 30 years in retirement? How about 40? Keep in mind, that many retirees underestimate how long they will live for; it is a miscalculation that could leave you financially vulnerable in later years.
Retirement objectives: Some Final Salary pension members may be attracted to transferring out of a scheme due to the increased flexibility that Defined Contribution pensions offers. It can sound attractive, but it may be of little value if your retirement plans would benefit from a reliable, set income each month. Your decision to transfer out should not be looked at independently of your wider retirement objectives.
Other assets to fund retirement: Do you have other assets that you plan to use to fund retirement, such as investment portfolios, property, or saving accounts? Your other sources of income will have an impact on the right decision for you. If you want to be able to take a lump sum from your pension, for example, transferring out may seem like the best option. Yet, other assets could provide you with the capital needed.
Confidence in handling finances: With a Final Salary pension, the scheme’s trustees were responsible for ensuring commitments were met. When transferring out, you will take responsibility for your pension, including how it is invested and accessed. If you are not confident in handling your finances and making decisions, this can be a daunting prospect.
Your attitude to risk: To ensure your transferred pension keeps pace with inflation, it will be advisable to invest it. This will mean exposing the capital to investment risk, and the value of your savings may decrease as a result. You should assess how comfortable you are with the potential risk your pension will be exposed to.
The auxiliary benefits provided: Finally, many Final Salary pensions come with additional benefits, such as a pension for your spouse or dependents. How valuable these are to you will depend on your personal situation. You should evaluate how important they are and what the cost would be to replicate them should you transfer out.
If you have a Final Salary pension and would like to discuss your options, please get in touch.