News & Articles
Articles 11.11.16

Defined Benefits and Final Salary Transfers

Articles 11.11.2016

Final salary transfers explained

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.

Six reasons to look at your transfer option

Historically, the view has been that “it’s always wrong to come out of a defined benefit pension scheme”. This is no longer always the case and here are six good reasons why.

  1. A final salary benefit could on transfer become a significant family financial asset, which can now be passed down through the generations without inheritance tax.
  2. Part of the investment risk associated with transfers can be removed thanks to the high transfer values at present.
  3. It’s unlikely that a 60 year old retiring now will have the same cash needs year in year out until they die. Transfers offer you complete flexibility over when and how much you draw from your pension account.
  4. 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.
  5. There is no life expectancy gamble with a final salary transfer. Irrespective of your personal health now and in the future, it capitalises the benefit once and for all based on normal life expectancy.
  6. With flexibility comes the potential for tax efficiency. Including:
  • 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

Do these transfers apply to you?

Final salary transfers are available to those who have left the employer who sponsored the scheme but have yet to draw their pension or cash sum, also known as ‘deferred scheme members’. Transfers are also available to employees at retirement or as part of an early retirement or redundancy package. The option of a transfer is a legal right to deferred members except in the following cases: 1. Where you are within 12 months of your normal scheme retirement age, in which case the transfer option will be at the discretion of the scheme trustees. 2. You are a deferred member of one of the public sector unfunded schemes, where transfers have been banned. Including the NHS scheme, teachers’ superannuation, police and military service schemes.

Why you might take a transfer offer

For many, they are giving up guaranteed lifetime income to take on investment risks, costs and the extra responsibility of looking after your own fund. However with the support of CBW Financial Planning you are in much better stead with all the support you will need. We will ensure the following on your behalf before proceeding with the transfer:

  1. The transfer value is generous if not at least fair versus the pension benefits left behind.
  2. You are comfortable with the investment platform we recommend to look after your invested fund.
  3. You can cope with a lower level of income later in life if the fund gets run down for reasons beyond our control, this is usually a function of having other sources of income and capital.
  4. You can make better use of the alternative withdrawal options offered by the transfer route as compared to the scheme cash and income options.

Changes to personal pensions at retirement

Pension drawdown: The removal of withdrawal restrictions

Historically, pension withdrawals were linked to annuity rates. So as annuity rates fell permitted withdrawal levels fell as well. However, you are now permitted to take as much or as little income from your drawdown account as you wish, as and when you choose to.

Goodbye to the death tax

Up until 2015, if you were over the age of 75 on death the remaining value of your pension account was taxed at 55% before moneys could be passed to the next generation. This was known as the ‘death tax’ and has been removed completely to allow pension accounts to be passed on to the next generation free from inheritance tax.

Why now?

Considered opinion has been that for the vast majority ‘best advice’ is to stay in schemes as they give a guaranteed income in retirement with little or no risk. So the option of a transfer has often only been brought to the attention of those with very big pension entitlements and by specialist advisers such as ourselves. In most cases they simply have not been discussed with you. Reasons to action this transfer soon:

  • Due to exceptionally low gilt yields, transfer values relative to future pension entitlements are currently very high.
  • The 2015 pension changes have provided uou with huge choice as to how pensions savings can be used in your retirement. These choices are not available to those who go on to retire on a final salary pension but can be accessed via a transfer and may be worth pursuing for many of you.

Further information

If you would like to discuss this further or any other opportunities, please email us at info@cbw.co.uk or call us on +44 (0)20 7309 3800.