Is there a good time to transfer your DB pension?
Defined benefit, or final salary, pensions are so valuable they have a reputation for being “gold-plated. These have come under the news recently for being mis-sold transfer. The pension regulator is quick to pick up on this. And are making it hard to transfer out of these schemes, with independent reports costing north of 1000 GBP and advisors unwilling to take them on as the risk of being sued.
So why the risk?
Final salary pensions provide a secure income for life. Retirees, who will rely on pension income to pay the bills for themselves and a partner through retirement, this is a great deal. As with the people living longer, having an income that is sustained for life seem a feasible option.
Why would you transfer out?
Transfer values – the amount of cash the pension scheme will pay you to leave with a lump sum, rather than an income for life – are at near-record levels. With low interest rate, meaning that annuities aren’t what they use to be and with companies having a higher level of debt and people living longer will pay, in some cases high amount to get you out of the pension schemes.
- But this is not without high risks, as investments can go up as well as down and is not an income for life.
- It is also, irreversible, once transferred out.
- Many advisors now are declining to take on pension transfer of DB for these reasons.
- When to consider taking action
- Some circumstances when you should consider transferring out
- If you’re unmarried, with no dependents the transfer value offered you will have a low cost of living, thus it could be enough to provide the essential income for retirement.
- People in poor health may find their shorter life expectancy.
High transfer values, like mentioned earlier with low-interest rates, this has lead to many transferring out their pensions, such famous cases as judges high ranked police officials, lords all have taken out their DB pensions, as have made calculations that would need to live into your well past 100 to be worth in the scheme. The final salary pension scheme may offer you an enhanced transfer value (ETV), effectively a higher transfer sum to make it more attractive for you to transfer.
Debt or money problems
A DC pension gives you more options on how to use the money from age 55 with a 25% tax-free lump sum. This could be an option in cases of serious financial hardship.
You have enough income to fund retirement, I had a case where a wealthy gentleman couldn’t transfer his DB pension although, have enough to suitable live on (very) comfortably for the rest of his years.
Also, if you have two separate final salary pensions, one could be transferred to a defined contribution scheme, where it could be used to bridge the gap to State Pension Age or top-up income in the early retirement years when you want to spend more on hobbies and holidays.
DC pension has more options for passing to beneficiaries. The ability to pass the fund directly to beneficiaries. Also, a DC pension with benefits that have not been taken, what’s known as uncrystallised, can effectively be passed on without being subject to U.K. IHT
Pension scheme problems where its British Airways, Royal Mail etc a lot of companies have got into pension problems.
Or worse, the company is at risk of becoming insolvent, it may be worth your while to transfer. Where an employer fails, the scheme goes into the Pension Protection Fund, but this “lifeboat” may not pay your full benefits if you have not yet reached the scheme’s retirement age. Transferring may allow you to secure a higher level of retirement.
If you have any questions regarding your pension, please contact me at info@investmentsforexpats.com and I can answer your questions!
