Final Salary Pension schemes are built on a trust-based system, where a trustee is responsible for managing your workplace pension. While these schemes offer security and a predictable income, they are not designed to align with your individual goals or risk appetite. If you're looking to maximise UK pension benefits and achieve more flexibility in retirement, a UK Pension Transfer may be worth exploring.
Transferring your Final Salary Pension is not a decision to take lightly. It requires regulated advice from an Independent Financial Adviser who understands both the technical aspects and your personal retirement objectives. In this YouTube video, our CEO and Independent Financial Adviser, Dominic James Murray, explains how to make the most of your UK Pension Transfer under the Pension Freedom rules.
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Final Salary Pension Pros and Cons
Final Salary, or Defined Benefit (DB) plans have always appealed to people due to the security they provide based on the length of your service, the date of your retirement, your final salary, and other factors. Furthermore, the Final Salary pension allows you to estimate how much you can receive annually. With this, you won't have to worry about your pension running out during retirement.
In the Final Salary Pension scheme, you can estimate how much you will receive annually. You never need to worry about fluctuations or whether your pension will be sufficient during retirement. The Pension Protection Fund (PPF) protects your pension fund from losses and other risks. The PPF exists to compensate DB schemes that cannot secure benefits which are at least equal to the PPF's level of compensation.
Defined Benefit Plan Rules
The DB scheme is not tailored to your risk profile. Similarly, it is not tailored to your investment or retirement goals. When you begin working, your employer automatically enrols you in your DB scheme. This process is standard for all employees.
The trustee will not meet with you to discuss your risk profile, plans, investment performance, or designated beneficiary when you die. You have almost no influence over how your funds are invested in a DB scheme. You also have no option to increase your investment in the plan. Not only that, but you must look elsewhere if you want to save more for retirement.
Most pensions do not permit withdrawal until you reach Normal Retirement Age (NRA). By October 2020, the NRA of the UK for men and women is 65. If you receive benefits while younger than NRA, your monthly benefits will be less than if you waited until after.
DB pensions are appropriate for people who have a minimal desire to expose themselves and their resources to risk. However, no investment is risk-free. DB pension systems can, and will continue to, run into financial difficulties, putting your pension income at risk.
Pension Freedom Act 2015
The UK government announced a dramatic change in how people could access their pensions when they retire. This adjustment, known as “Pension Freedom,” which came into force in the 2015-2016 tax year.
Pension Freedom only applies to private pensions where you or your employer make contributions, known as defined contribution or money purchase pensions. It does not apply to the state pension or Defined Benefit (Final Salary) pensions.
Before the pension freedom reforms, most people would cash in their pension, take 25% as a tax-free lump sum, and use the rest of the money to buy an annuity. An annuity product provides you with an income each year until you pass away. The pension freedom allows you to take the pot freely and flexibly, including the opportunity to take the entire pot all at once.
However, you should remember that you cannot utilise the freedom rules with your pension until you are 55. You can access your pension at 55 to support your retirement. While it is rarely a good idea, this includes withdrawing all the money at once. How you proceed depends on your situations, risk profile, retirement goals, and other influencing factors.
How Do I Access My UK Pension?
To begin with, the new rules still allow only 25% of the pot to be taken as a tax-free sum. This means that if you take the entire pot at once, 75% will be taxed. Most people's pensions are designed to sustain their income demands throughout retirement, which can last decades. Thus, taking all the money out early, or all at once, may result in insufficient funds in later retirement. If you are not taking all your money at once, the pension freedom rules provide three fundamental options.
Option one is to keep money in your pension for when you need it. It is noteworthy to mention that in this case, if you withdraw sums, you receive 25% of each lump sum you withdraw tax-free. For example, if you had £100,000 in your pension and took $10,000 out, you would receive £2,500 tax-free. The remaining £7,500 would be taxed at your income tax rate in the year you made the withdrawal.
Option two is to take 25% tax-free and then purchase a flexible income drawdown product. You purchase this product to keep the rest of your investment growing. However, it can also be used to generate income when necessary. The tax calculation is different here; you get the first 25% tax-free, and the rest is taxed when you take it, which could be advantageous if you're likely to be at a lower tax rate once you're older.
Option three, the main option before the introduction of pension freedom regulations, is to take 25% tax-free and then purchase an annuity, which provides a guaranteed income each year for the rest of your life.
DB Pension Transfer – Why You Might Consider Transferring Your Final Salary Pension
Transferring from a Defined Benefit (DB) pension scheme to a Defined Contribution (DC) or Personal Pension scheme gives you much more flexibility, as specified by the ‘pension freedom' rules. While DB pensions pay a fixed amount based on a calculation at the end of your professional years, it is entirely up to you how much and when you withdraw from DC plans.
Transferring your DB pension as soon as possible can help ensure that the growth of your pension matches your future financial needs. The problem arises when it comes to return on investment. The average return on the S&P 500, for example, over the previous ten years has been 10%. In contrast, your DB pension only provides an average return of 2% to 3%.
Because DB pension transfers are not for everyone, seeking the advice of an Independent Financial Adviser is always a better option. IFAs have a depth of experience in dealing with pension transfers; they have evaluated thousands of financial plans for different circumstances. The FCA regulates these pension transfers and have the experience to determine if a transfer is suitable for you.
Cameron James: Helping You Maximise UK Pension Benefits
Choosing whether to transfer your DB or DC pension into an international SIPP is a significant decision that demands expert knowledge. Without proper guidance, a valuable pension could become a missed opportunity.
At Cameron James, we specialise in helping clients maximise UK pension benefits through clear, FCA-regulated advice. With over a decade of experience and clients in 35+ countries, our advisers understand the complexities of pension transfers for expats.
Our mission is simple: to help you access the retirement you deserve, with clarity, confidence, and no hidden fees.
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