Should I Transfer My Final Salary Pension?
Should I transfer my Final Salary Pension is the number one question we receive from our prospective clients. As such, we have completed this article to try to directly answer this question or at least provide people with a baseline understanding of whether a transfer may be suitable for them or not.
If you have found this article, then you will likely already know that Final Salary Pensions or Defined Benefit Pensions are dubbed ‘gold-plated’ due to their safeguarded benefits. These types of pension schemes are one of the most valuable pensions in the UK, in comparison to their close relative, Defined Contribution Pensions (DC schemes) which have no safe guarded benefits.
There are numerous important factors to consider when it comes to transferring your Final Salary Pension.
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, 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.
While very rationale, this point alone would not satisfy the TPR and FCA’s pension transfer guidelines for a pension transfer to be suitable. Kindly remember that the FCA ask us and all IFAs to start from the default base point that a Final Salary Pension Transfer is not in the best interests of the client.
Is a Transfer Suitable for Me?
Warning: Transferring your final salary, or Defined Benefit pension (DB), is something not to be taken lightly. It will have a direct impact on your retirement. For some, a transfer may be suitable and would improve their retirement goals and objectives. While for others, transferring your Final Salary Pension could be a detrimental decision that leads to financial instability during retirement.
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.
A transfer could be the worst decision of your lifetime if the Defined Benefit Pension is one of or your sole sources of income during your retirement, and you are not comfortable with investment risk and prefer a defined and guaranteed income for life from your DB scheme.
Below, we have compiled a few significant reasons of why you should and should not consider transferring your Final Salary Pension. The list is not exhaustive, it will give you a glance of what should be considered before you even embark on a lengthy and costly Authorised DB Advice process.
Keep in mind that this list does not necessarily represent your situation, we strongly recommend that you take qualified and experienced advice from an IFA to understand the implications of a DB pension transfer to your life.
Why You Should NOT Transfer Your Defined Benefit Pension
These points below represent some key reasons individuals may be better off retaining their UK DB Scheme and when transferring Final Salary Pension scheme might not be in their best interests.
Guaranteed Income (Scheme Pension/Annuity)
As above, a Defined Benefit Pension is often referred to as a “gold-plated” pension. It is called this as it gives you a defined amount of income for life during your retirement. This specific amount of income is effectively an annuity, which is also called a scheme pension and is typically payable to you from your Normal Retirement Age (NRA) of 60 or 65.
The value of your DB pension annuity is calculated based on your scheme rules which are typically numbers of years of service, your final salary, and the scheme accrual rate (1/60th or 1/80th). Its ongoing annual value is influenced by several factors, including inflation and interest rates.
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, which 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. A death benefits means a certain percentage of your pension can be passed to your spouse or beneficiaries in the event of your death.
Commonly, the pension provider will arrange up to 50% of your pension income to be given to your spouse or beneficiaries. Remember that the 50% amount is still influenced by a few aspects such as income tax and inheritance tax, which you should check with your pension 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).
In the event of your death before withdrawing your DB pension benefits, usually the widower will be paid a Final Salary Pension Lump Sum. This amount is calculated from the annuity amount multiplied by a given 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.
With global economy having already now recovered from the Pandemic lows, it is highly likely that we will see interests rates in the coming quarters which will negatively affect 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 value of the pound sterling if Scotland left the UK or a further round of Brexit backlash from the EU? Pound sterling can experience currency fluctuations and for anyone living in Europe and the US for some time, you will remember when GBP was €1.6 and even $2 in the USA.
In short, your pension pot value will be less relative and its value will be decreased when imposed to other currencies. Obviously, this will be problematic if you are planning to retire abroad because your pension will be lower in value than you expect before.
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 realizing 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 minimize 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. You can check one of our IFA’s qualification here.
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
Then, check their reputations in the industry. Are they highly regarded or not? How many experiences do they have? What others says about them? This will give you a better look of the IFA or firm that you are working with.
In one of our YouTube video, our experienced IFA and CEO, Dominic James Murray answering the question “Should I Transfer My Final Salary Pension?”. Please refer below to go to the video in our YouTube channel, and you can subscribe for more high-quality content videos about UK pension transfer.
Talk to a Final Salary Pension Transfer Specialist
Defined benefit pension transfer is not something you have to take lightly. First, you have to understand the deals that you are getting from transferring your pension. Is it a good deal for you or not? Is it in your best interest? What benefits will you give up? You have to fully observe it since every transfer will be based on your circumstances.
This is why talking to a regulated independent financial advisers at Cameron James will help you to make the correct decision that you will not regret. Initial consultation with Cameron James is always free of charge. Book your convenience date through the button below and let Cameron James help you with your final salary pension transfer process.