Final Salary Pension Transfer Guide
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Final Salary Pension Transfer Guide Inside The Guide Reasons to consider a transfer
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Final salary transfers explained
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Who is able to transfer?
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Why are more transfers taking place now?
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Reasons for and against transferring
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How to transfer
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Our case studies
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About us
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Key Points Greater pensions flexibilities were introduced in 2015 Annuity purchases have dropped since the new pension flexibilities were introduced Final Salary transfer values have risen as annuity rates have dropped
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Final Salary Pension Transfer Guide Introduction In 2015, the new pension freedoms introduced by George Osborne changed the pension landscape. Annuities were no longer the traditional way to receive income in retirement, and this, coupled with historically poor annuity rates over the last 20 years, has led to a reduction in annuity sales for people looking to take a retirement income.
Why have annuity rates fallen? Annuity rates have decreased drastically over the last 20 years, fuelled by increases in life expectancy making the cost of providing an annuity larger for the providers, and further compounded by gilt yields being at or around historically low levels.
To consumers, an annuity’s twin advantages of: • insuring against a longer than normal life expectancy and, • a guaranteed income for life are now looking increasingly unattractive when compared against other options at retirement. Retirement nowadays can encompass many differing stages and needs, each with it’s own requirements for income and capital expenditure. Flexibility to take lump sums, alter income levels as appropriate, and react to changing life circumstances are now becoming the overriding consideration of many modern retirees.
How are annuities and final salary pensions linked? Fundamentally, if you are waiting for a final salary (defined benefit) pension to become payable, you effectively own a deferred annuity. You will receive a guaranteed pension for the rest of your life set at a predefined rate and possibly including escalation in payment. What if you don’t want the set guaranteed payments, or would like to take benefits at a different age or in a more flexible manner? Most final salary schemes allow you the option of transferring your benefits into a personal pension as a cash sum instead (Cash Equivalent Transfer Value).
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With annuity rates being incredibly low at present, the cost of providing annuities has soared, meaning that these Cash Equivalent Transfer Offers (CETV) have also significantly increased. Consequently, due to more flexible pension options and higher CETV’s, we are now observing an increase in the number of people wishing to transfer their final salary schemes into a personal pension plan.
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Final Salary Pension Transfer Guide Reasons to consider a transfer Whilst the FCA’s view has not changed regarding pension transfers, we have seen an increase in the number of people looking at the other options available when drawing their scheme benefits. We have outlined some of the key reasons people consider a transfer below.
4. Tax Efficiency:
1. Wealth protection:
• The potential for a higher tax free lump than if you stayed in the final salary scheme.
A final salary scheme can be a large part of a family’s financial assets. By transferring, the control of the full fund is under your control, and the capitalised value can be passed down through generations with no inheritance tax payable.
2. Investment risk: With transfer values being so high currently, the investment risk needed to achieve the same level of benefits at retirement as the final salary scheme was offering has often been reduced.
3. Flexibility: Your choices at retirement are significantly increased. Subject to minimum age (currently 55), you are able to choose when and how much income and capital you would like from your pension funds. For example, 25% of the fund would be available as tax free cash which you could use to pay off a mortgage or for a one off special purchase. Additionally, you can adjust your income according to your wants and needs through the stages of retirement. Generally, people spend more in the early years when they are more active than in later years. With a final salary pension, the annual amount is fixed irrespective of your situation.
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There can be various tax efficiencies to transferring a final salary pension, such as: • The ability to adjust your income in retirement, making the best use of the tax bands.
• The ability to minimize and defer any liability to lifetime allowance tax charges.
People with fund values of above £1m (or higher if protection is in place) can defer the impact of the lifetime allowance (LTA) penalty tax charges until 75 if their benefits have been transferred into a personal pension.
Final Salary Pension Transfer Guide Final salary transfers explained A final salary (or defined benefits) pension pays you a pension for life at a pre-set amount, guaranteed by the scheme and the employer (or alternatively an insurance company if the liabilities have been sold to them). You will choose an initial tax free lump sum (if applicable) and pension income from a limited range. This income will be fixed to increase each year to hedge against inflation and will generally include a spouses pension. This means that the longer you and/or your spouse live, the larger the total amount of benefits you will receive. A transfer swaps this future entitlement for a present day cash sum that must be initially placed into a HMRC registered pension scheme until you reach the minimum age entitlement (currently 55). The cash amount is known as the Cash Equivalent Transfer Value (CETV), in essence it is the amount which would need to be set aside in the scheme today in order to provide your benefits in retirement. The CETV is calculated by the scheme actuaries, and varies according to: • Your length of service, salary, and the scheme’s accrual rate—effectively your level of pension benefits when you left service with the employer. • The scheme’s rules on how your pension benefits are revalued in deferral (until you decide to take the benefits) and escalation (benefits in payment), plus any spouse and dependent benefits. • The length of time before you are due to reach the scheme’s retirement age. • Assumptions on longevity and expected investment returns in future years.
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The scheme actuary will use standard assumptions for longevity, investment returns, and whether you are married when calculating the CETV, rather than adapting these for your personal situation. If your independent financial adviser recommends that you transfer from the scheme your CETV is usually transferred into a personal pension. At this point the investment risk becomes yours. How your fund performs over time (and therefore the level of income and lump sums you will be able take) is dependent on how your fund is invested and what the actual investment returns are. If the fund performs well, you may end up with benefits of a greater value than those in the final salary scheme. If the fund performs poorly, you may end up with benefits which are significantly less than those which you have given up. The trustees will not allow members to transfer if their CETV is £30,000 or above without seeking financial advice. If the fund is below £30,000 the member should still seek financial advice as transferring may not be in the member’s best interests.
Once the benefits have been transferred from the final salary scheme, the decision is irrevocable—hence the requirement for members to seek financial advice if their transfer value is above £30,000.
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Final Salary Pension Transfer Guide Who is able to transfer? Transfers are available to: • Employees who are deferred members of the scheme (have left employment with the company, but not yet drawn their pension or taken a cash lump sum). • Employees still working for an employer until retirement. In most cases you would still want to accrue benefits in the scheme up until you were ready to retire. It would be best to check when the last date for you to be able to transfer from the scheme would be, as this differs from scheme to scheme.
Transfers are not a legal right for deferred members when: • You are within 12 months of the scheme’s normal retirement age. This will then be at the discretion of the scheme trustees. Additionally, transfers are not allowed from public sector unfunded schemes such as teachers, NHS, military service, and police schemes.
Why are more transfers taking place now? Transfers from final salary (defined benefit) schemes have been available for around 30 years. However, as previously mentioned, the ‘perceived wisdom’ has always been to leave them as they are. This, coupled with the fact that 1 employers are not legally able to provide advice on the transfers and 2 financial advisers need specialist qualifications to provide advice, have meant that historically, the vast majority of people have not followed the transfer route as it has never been discussed with members. The main drivers to change this stance have been the increased choices at retirement introduced in 2015, and the substantial increase in transfer values due to current investment conditions (low gilt yields).
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Suddenly many people are seeing transferring their final salary pensions as a viable option and are more willing to consider it as a possible option to provide for their retirement needs. In particular, high transfer values are causing people to reconsider transfers. Firstly, the higher headline figures are proving more difficult for people to ignore when considering the possibilities of increasing family wealth. Secondly, the increased values could mean that in general people can be relatively cautious in how they invest their fund and still meet the benefit level of the original scheme , whilst reaping the rewards of extra flexibility.
Final Salary Pension Transfer Guide Reasons for transferring It is important to remember that a high transfer value is not by itself a reason to transfer. There are many other considerations which need to be taken into account, we have summarised some of these below: • The transfer value is generous and represents a good value compared to the pension benefits left behind. • The extra flexibility of taking income and lump sums available after a transfer would suit your requirements better. • You are comfortable with assuming the risk for the investment growth once the funds have been transferred (including seeking advice to ensure that your investment strategy meets your objectives and risk profile).
• You would be able to accept the possibility of a lower level of income from the funds in later life if your fund depletes—(people with other sources of income and assets can mitigate the risks of fund depletion). • The advantageous death benefits of the transferred fund would be beneficial to your own situation. • You may have an expected shorter lifespan than the average.
Reasons against transferring Similar to the above, a small transfer value is not necessarily a reason not to transfer. There are several other considerations to take into account, we have summarised these below: • You have a very low attitude to risk and would prefer a guaranteed income for life. • The final salary scheme would be your only source of income in retirement and you would have very little tolerance to this changing or being depleted. • You have little or no experience with looking after savings and investments—this can be reduced by using a correctly qualified financial adviser or other professionals.
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• If you are not intending to access your funds flexibly/early/on an adhoc basis as you enter retirement. Additionally, if the income you require will be fairly static and is already matched by the benefits provided by the scheme. • You are not intending leaving the funds to any future generations.
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Final Salary Pension Transfer Guide How to transfer Request a transfer value You (or your financial adviser if you have one) will need to request a Cash Equivalent Transfer Value (CETV) from the scheme’s administrators. If you already know who you will be using for advice, it is easier to get them involved in the process as early as possible, as they can usually approach the scheme to find any other information they need in order to advise you correctly.
The CETV is valid for 3 months, which would normally give you time to arrange and receive the advice you need in order to decide whether a transfer is the correct choice. If this 3 month period expires, you will need to request a new CETV from the scheme (most likely at a cost to you), if the scheme will allow.
You are usually entitled to one free CETV per year. Any further requests within a year may result in a cost to you (scheme specific cost).
How to transfer Speak to a qualified Financial Adviser It is a legal requirement to receive qualified financial advice if your CETV is more than £30,000. The scheme must receive evidence that advice has been received before they will proceed with a transfer. Make sure that your financial adviser has the correct qualifications to give advice on defined benefit/final salary pension transfers.
The advice should cover: • A meeting to establish your overall financial situation, objectives and needs over the coming years. • An explanation of the options and benefits you are entitled to from the final salary scheme, along with taxation regulations. • An explanation of the options, benefits, and taxations of the funds if they were transferred into a personal pension. • A Transfer Value Analysis Report showing the investment return per year required on the transfer value in order to match the scheme benefits at retirement.
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Final Salary Pension Transfer Guide How to transfer Planning for the future Once the transfer has taken place, it is important that you have a financial plan tailored for your needs. Factors to consider include: • What are your requirements and objectives now and in the future?
Financial planners can also provide you with a cash flow analysis to help you understand the options available to you, and the potential repercussions of any changes.
• What is the most tax efficient way of achieving this? - taking into account the dividend allowance, increased ISA allowance, personal allowance, savings allowance, and capital gains allowance. • When will you need access to your tax free cash and pension income? • How will your funds be invested and managed to achieve this plan?
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Final Salary Pension Transfer Guide Our case studies - Mark, aged 55 Mark has been offered a transfer value of £280,000 from a Local Government scheme. His pension benefits are £11,500 today, or £14,000 at the scheme’s normal retirement age. Mark currently works full time, has no partner, has 2 sons aged 25 and 24, and owns his own home with no debt. He has savings in excess of £100,000 in ISA’s and also has a part share in several buy-to-let properties which have a low debt to equity ratio, and give him a net income of around £2,000 per month. Mark’s family has a history of early death, with both parents dying before the age of 60.
Mark’s priorities were:
In this case , Mark’s transfer value represented 24 times the current deferred pension.
He believes that longevity would be an issue for him, and he has no spouse to benefit from a pension after his death. Whilst he is giving up a lifetime income, he feels that the flexibility on the transfer, will better suit his current and ongoing objectives.
1 To use the tax free cash (£70,000) to service his property portfolio. 2 To ensure his children would benefit from his pension fund. We recommended Mark transferred his benefits. He had immediate access to his tax free cash, which he used to reduce debt on his properties. He then invested the remainder in a medium risk fund, which he has earmarked to pass on to his children.
Juliette - aged 52 Juliette has been offered a transfer value of £900,000 from her previous employer. She has worked in the oil industry all of her life, and wants to retire at the age of 55. Her pension scheme has a normal retirement date of 60, her pension at 55 would be reduced by 20% to a value of £24,500 per annum. She is married, has no children, owns her own home with no mortgage, and has a holiday home in Spain. In this case the transfer value is 35 times her benefits at her desired retirement age of 55. Juliette’s priorities were: 1 Retire at age 55 2 Provide an income of £35,000 in retirement.
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We recommended Juliette transferred her benefits. She wants to retire at 55, the reduction in her benefits of retiring before the scheme retirement date makes the transfer value even more attractive. Her objective of £35,000 income per annum could be met by investing in a fund achieving an approx. 4% per annum return net of charges, without depleting her funds over time. Additionally Juliette is happier that, should she die, her husband will have access to the full value of the fund, generating a higher income than the available spouses pension of the ceding scheme.
Final Salary Pension Transfer Guide About Prismatic Wealth Established for 30 years, Prismatic Wealth provide bespoke, tailored financial solutions to corporate and private clients. Our advice covers areas such as retirement planning, corporate planning, wealth and estate planning. Although based in the North East of England, we advise private and corporate clients throughout the UK and globally. We look after clients funds under management totalling over £100 million. We have particular expertise in all areas of pensions, including extensive experience in providing advice for final salary pension transfers, working repeatedly with over 70 different schemes.
Our Final Salary Pension Transfer Service Stage 1 – Getting to Know You
Stage 4 – Ongoing Advice Service
It is important that we understand fully your financial situation and your objectives. We will ask you to complete our client questionnaire and our risk profile questionnaire which will help determine your attitude to risk.
Whilst agreeing and implementing your plan is an important step, it is only the beginning of the process. Our ongoing advice service is vital to ensure your investments stay on track to help achieve your goals.
Stage 2 – The Financial Plan Once we understand your needs and have agreed the amount of risk you are willing to take, we will build a financial plan to help you achieve your goals, which may include cash flow planning and preparation of a detailed report outlining our recommendations.
Stage 3 – Implementation
It includes: • Forward planning meetings • Investment review • Taxation and legislation updates • Ad – hoc assistance • Withdrawals • Ongoing support • Client communication
Once we have agreed on a plan, we will implement that plan, preparing all of the paperwork and liaising with the providers. We will keep you updated on the progress and arrange a completion meeting to run through everything.
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Final Salary Pension Transfer Guide
Prismatic Wealth Limited Victoria House Pearson Way, Teesdale Stockton On Tees TS17 6PT Office: 01642 661 600 enquiries@prismaticwealth.co.uk Prismatic Wealth Limited is an Appointed Representative of PrisWM Limited, which is authorised and regulated by the Financial Conduct Authority
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