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Should I opt for a pension transfer?

Should I opt for a pension transfer?
June 27, 2017 georsquareads17

George Goward, MD and financial adviser at George Square Financial Management, explains why many people are opting to transfer out of their defined benefit pension schemes and offers some guidance on deciding whether a pension transfer is right for you.

Defined benefit pensions (or final salary pensions) have come under the spotlight since the well-publicised pension deficits of a number of high profile companies such as BHS. Whilst they were once considered to be ‘gold plated’ pension schemes, more and more members of defined benefit 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.

So, why would you consider a pension transfer?

Well, the global investment crash that gave us ‘quantitative easing’ brought record low government GILT yields which has led to some pension trustees 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 40 times more than the preserved pension, making transferring out an attractive option for some.

But, since pension transfer values depend partly on the direction of interest rates, there is likely to be a limited window to take advantage of these high cash lump sums. Although the Bank of England has not yet given any indication that a rate hike is imminent, once rates start to rise we are likely to see a drop in pension transfer values. 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, eg. 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.

The lifetime allowance for pensions is currently £1m. Anything above that can be subject to additional tax charges, but the flexibility of modern contracts means that this can be managed so these charges do not apply.

Many of our clients who are considering transfers are doing so to facilitate either early retirement or phasing retirement, believing they would otherwise have to continue working to the new higher state pension ages. Their existing final salary pensions will offer a fixed income that usually starts without penalty from age 65, however with a ‘drawdown’ pension the client can 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.

Is a pension transfer the right choice for you?

We know that transferring out of a defined benefit pension is a big decision and knowing what to do for the best is tricky. It’s important to consider your personal circumstances and think about what you require from your retirement benefits.

Pension transfers are usually irreversible, so determining whether or not it is appropriate depends on your circumstances and whether the loss of promised pension benefits and the investment risk is in your best interest and not purely based on the rate of return.

An authorised financial adviser in pension transfers will be able to help you conduct a careful assessment of your situation to determine the best course of action.

If you are concerned about the future of your defined benefit pension and in a dilemma about whether a pension transfer is an option for you, contact George Goward at George Square Financial Management for a friendly chat on 0115 947 5545 or drop him an email.