There are a number of factors to consider when considering to transfer your pensions such as:
- The transfer value
- Charges associated with the transfer and the new scheme provider
- The type of plan you need i.e. flexible access
Is taking the guaranteed income option the best thing for you, or are you missing out on a much better proposition? The answer is as simple as it is complex: It is appropriate for some people, sometimes.
For those with straightforward affairs and a need for a steady income to replace their earnings and supplement the state pension, the best course of action is to usually stick with the scheme. However, no one’s affairs are entirely straightforward. The following factors are just a few of the many that should be considered before a transfer should take place:
- Death benefits of the scheme
Single people generally can’t pass their final salary pension on to their children or grandchildren upon death. A Defined Contribution (DC) pot can be passed on to any named beneficiary. It also escapes inheritance tax and can often be withdrawn by the beneficiaries tax-free.
- Succession planning
Those with a final salary pension who are not in need of the income it provides, may wish to convert it to a DC pot as a potentially tax-free inheritance for their families. This will not be subject to 40% inheritance tax like most other assets, such as property.
- Income tax
Those with other sources of income contemplating taking final salary pension benefits should be aware that they may be subject to income tax at the highest rates. They may also fall into the individual’s estate upon death, and therefore be liable for inheritance tax. The assets passed on in this scenario may consequently end up being taxed multiple times at 40%, compared to being completely tax-free in a DC scheme.
- The security of the company paying your pension
Final salary schemes are typically insured by the Pension Protection Fund (PPF), but there are limits to the insured amount. Well managed, diversified pension portfolios could, in fact, bear less risk than a single employer-funded scheme if your income in retirement exceeds those limits.
- The options for a tax-free lump sum
Schemes can vary in the amount of lump sum they offer, and some offer none. DC pensions offer a tax-free lump sum of 25% up front, and the rest can be ‘rolled up’ in the pension environment and left until a future date for tax-savvy withdrawals, using all available allowances.
For most people, deciding what to do with their pension is likely to be the biggest investment decision of their life. It is therefore vitally important to fully explore all the options available and seek expert ad-vice before simply cashing in.
Choosing to give up a very valuable and guaranteed income is a decision that should not be taken lightly, but there are circumstances where transferring can have huge benefits. For people with serious health issues, for example, a lifetime income will not be valuable so cashing in can make sense. Regardless of the decision that is ultimately made, individuals must be certain that they fully understand the potential consequences and are comfortable with them.