Many clients ask, “Should I transfer my Final Salary Pension?” This is the most common question we receive. To help answer it, our experienced IFA and CEO, Dominic James Murray, explains the key factors in this YouTube video. You can watch it below and subscribe to our channel for more high-quality UK pension transfer guidance.
Final Salary Pensions, also known as Defined Benefit (DB) pensions, are highly valuable in the UK due to their guaranteed benefits. Compared with Defined Contribution (DC) pensions, which lack guaranteed income, Final Salary Pensions provide security that you must carefully consider before making any transfer decision.
UK Defined Benefit Pension Transfer
A Final Salary Pension Transfer involves numerous factors, making it difficult to make a quick decision whether to complete a DB pension transfer. As mentioned above, one of the main reasons is that everyone has different circumstances and needs.
For instance, a UK resident retired in the US may wish to hold their pension assets in the currency of their planned retirement (e.g. USD). As such, considering an International SIPP, that would allow both GBP and USD in the portfolio. Doing this can allow them to mitigate currency risk during their retirement. Unlike their UK final salary scheme, which can only be based and paid in GBP.
Although logical, this factor alone cannot meet TPR and FCA guidelines for a suitable pension transfer.
The FCA requires all IFAs to assume, by default, that transferring a DB Pension is not in the client’s best interest.
Is a Transfer Suitable for Me?
Warning: Do not take transferring your Final Salary or Defined Benefit pension lightly. This decision directly affects your retirement. For some, transferring can help achieve their retirement goals and boost their financial security. For others, it could harm their retirement plans and create financial instability.
Camp Suitable Vs Worst Decision
A DB transfer may be appropriate if it constitutes a proportion (or even better, a small proportion) of your overall assets, and you are not solely reliant on it for your income needs in retirement. You may wish to achieve a higher level of growth than the indexation offered by your UK ceding scheme and feel comfortable with investment risk and taking advice from an IFA or even managing it yourself.
Transferring could be the worst decision if your DB pension is your main or sole retirement income.
If you dislike investment risk and prefer a guaranteed lifelong income from your DB scheme, a transfer may harm you.
Below, we outline key reasons for and against transferring your Final Salary Pension. This list highlights important factors to consider before beginning a lengthy and costly Authorised DB Advice process.
Keep in mind that this list does not necessarily represent your situation. We recommend that you take qualified advice from an IFA to understand the implications of a DB pension transfer.
Why You Should NOT Transfer Your Defined Benefit Pension
These points show why some individuals benefit more by keeping their UK DB Scheme. They also explain when transferring a Final Salary Pension might not serve your best interests.
Guaranteed Income (Scheme Pension/Annuity)
A Defined Benefit Pension, often called a “gold-plated” pension, provides a guaranteed income for life during retirement. This income acts as an annuity, also known as a scheme pension. This usually starts at the Normal Retirement Age (NRA) of 60 or 65.
Your DB pension annuity value depends on your scheme rules. This includes years of service, final salary, and the accrual rate (1/60th or 1/80th). Inflation and interest rates also affect its annual value.
One of the advantages of the DB Scheme Pension is that it is index-linked with the inflation rate. As such, your pension will still have the same purchasing power throughout retirement, therefore it is effectively inflation-proof.
This is why transferring a Final Salary Pension Scheme is not a simple decision. If you have the desire to transfer, it would mean you would be foregoing this inflation-linked annuity. This can provide a level of protection against the rise in the cost of living. Although inflation over the last 20 years which can rise by varying amounts depending on inflation pressures.
Let’s take an example of an annuity. At your normal retirement age, your pension provider may give you an income of saying £15,000/p.a in January each year. Many people may see this as a great advantage since they do not have to worry any more about their income because they are guaranteed to have this annual arrangement of income until the time of their death.
Death Benefits
Another significant benefit of Final Salary Pensions is their death benefits. This is when a certain percentage of your pension is passed to your spouse or beneficiaries in the event of your death.
Pension providers commonly allocate up to 50% of your pension income to your spouse or beneficiaries. Keep in mind that this amount can be affected by income tax and inheritance tax, so check with your provider.
A spouse is easy to understand. However, who constitutes a beneficiary? A beneficiary can typically be the person(s) who are your dependants. A beneficiary can be your son, or daughter (if they are still your dependants).
If you die before withdrawing your DB pension benefits, your widower usually receives a Final Salary Pension Lump Sum. The provider calculates this amount by multiplying your annuity by a set rate.
Possible Reasons Why You SHOULD Transfer Your Defined Benefit Pension
At this point, you have understood that there are significant benefits in retaining your Final Salary Pension. Below, we discuss three of the top benefits you could gain from transferring your Final Salary Pension: CETV rates, International SIPP and QROPS drawdown flexibility, and currency risk.
CETV Rates
A CETV (Cash Equivalent Transfer Value) is the cash value of your Final Salary Pension if you choose to transfer it out as a one-off lump sum into a SIPP, International SIPP or a QROPS.
As you will likely know, CETVs have an inverse relationship with interest rates. Since the Financial Crisis of 2008, we have been living in an artificially low-interest rate environments as governments try to stimulate consumer spending instead of saving. In 2020, we were again hit by the Global Pandemic, with global economies facing another economic crisis. As such, interest rates have remained at record lows.
Whether you agree with this economic policy or not, low-interest rates and thus gilt rates, have significant impact on the CETV of your Final Salary Pension. Record high CETVs have been across this period, with some multiple reaching x50.
One of the crucial factors in the calculation of your CETV is interest rates. This is because your defined benefit scheme calculates your CETV using the current interest rate by discounting your estimated pension value at retirement. Therefore, when interest rates are lower, the discount is smaller, which will boost your CETV higher. This has created urgency for many people to transfer their DB pension before interest rates go up and their CETV value falls.
As the global economy recovers from pandemic lows, interest rates will likely rise in the coming quarters, which could lower CETV rates.
Flexibility with SIPP and QROPS
International SIPP and QROPS are both personal pension products. Despite their differences, both offer similar advantages when transferring your Final Salary Pension.
If a Final Salary Pension transfer into international SIPP or QROPS is suitable for you, then you could benefit from a number of advantages. Particularly, if you are a living abroad (beyond the UK) and looking to withdraw your pension in the currency of your retirement needs (USD, EUR etc) an International SIPP or QROPS could be the right solution for you.
Some top benefits you can gain from an International SIPP are: pension pot consolidations, wide range of investment options, total control of your pension, and flexibility upon the percentage of death benefits, which you can decide with your pension provider. These are just a few of the many advantages which you can discover comprehensively via reading our dedicated International SIPP and QROPS pages.
Some benefits mentioned above (such as investment control) contrast sharply with your Final Salary Pension scheme, where you will have no control over the investments. For some clients, this is helpful as they prefer not to take an investment risk while for other clients, this may mean limiting their returns.
Currency Risk
Your Final Salary Pension will, by default, be paid in pounds sterling (GBP). If you are working in the UK, this is ideal, and you will be able to withdraw your pension in GBP. Your pension income will thus match your retirement income needs.
However, what happens if you live abroad? What would happen to the pound if Scotland left the UK or Brexit created another EU backlash? Pound sterling can fluctuate. People living in Europe or the US may recall when GBP reached €1.6 or $2.
In short, your pension pot loses value when converted into other currencies. This becomes a problem if you plan to retire abroad, as your pension may be worth less than expected.
With transferring to SIPP or QROPS, you have the freedom to choose which currency you prefer, and you would like to invest in. Moreover, you can choose to withdraw your pension in your preferred currency. For instance, if you decide to retire in the US, you would prefer your pension pot in USD rather than GBP. International SIPP and QROPS are capable of realising this.
What Should I Look for When Transferring My Final Salary Pension?
Now that you have understood the benefits and drawbacks of a Final Salary Pension transfer, we would like to give you some tips on what you should look out for when you are choosing the right IFA for you.
This recommendation is to minimise the chance of getting the wrong IFA as well as pension scammers getting to you. The list below is the significant things to look out for an IFA or expat financial advisers.
IFA Regulated – (FCA, SEC, CySEC, FSC, EU MiFID)
The first, is to check the regulation of the IFA or the firm. Are they FCA regulated? Most importantly, if you are residing outside the UK, check their regulations to see whether they are regulated to give advice in the country you reside in. You can check our regulations here.
Qualifications
If they are regulated, the next thing you need to check is their qualifications. Are they qualified to give you advice? From time to time, IFAs are required to do examinations to improve their knowledge and qualifications to give the most updated advice tailored to your conditions.
Reviews and Client Testimonials
Word of mouths are the best advertising. Luckily, in this digital era, you can check a firm’s experience with their past clients by looking at their testimonials. You can find the testimonials on their website or other trusted business profile such as Google. Check our Google Reviews to see how our past clients’ experience with us.
Highly Regarded
When choosing an IFA for your Final Salary Pension transfer, reputation matters. Look for advisers with a strong track record in DB pension transfers. Check client reviews and testimonials on trusted platforms like Google to see past experiences. A highly regarded IFA demonstrates professionalism, extensive experience, and positive client outcomes, giving you confidence that your pension decisions are in safe hands.
Talk to a Final Salary Pension Transfer Specialist
A Defined Benefit pension transfer is a significant decision that can impact your retirement for life. Understanding the benefits, risks, and suitability is crucial before proceeding. At Cameron James, our regulated independent financial advisers specialise in Final Salary Pension transfers and provide tailored advice based on your circumstances.
Book Your Free Consultation today and ensure your pension decisions are safe, informed, and aligned with your retirement goals..