Having a pension is critical to your long-term financial wellbeing and security. To encourage people to save and make the most of their pensions, UK government has introduced a range of flexibilities designed to give you greater control over your money. Known as ‘Pension Freedoms’, these changes allow you to take your retirement benefits as you see fit. This means you can turn your retirement income on and off, take a lump sum, or leave your pension to grow. Defined Benefit Schemes, on the other hand, have fixed retirement ages and do not allow you to vary your income or make choices about how you take your benefits.
Final Salary Pensions don’t allow you to vary the income you receive from them. Depending on your financial circumstances and other incomes you receive, you may find you only need to dip into your pension from time to time. Many people are now choosing to work flexibly or part-time, retiring gradually rather than finishing work altogether. Thanks to Pension Freedoms, you can use your pension to top up income as you need to and plan your income so that you do not pay an unnecessary Income Tax.
Defined Benefit Schemes, however, will pay a defined regular payment that may mean you paying tax on income you don’t necessarily need to take.
When you die a Defined Benefit Scheme will pay a reduced benefit to your spouse until their death or to a dependent child under the age of 23. Qualifying rules must be met for these payments to be made. Apart from this, the value of your pension is lost for good.
Death benefits are extremely rigid and, if you are not married and have no financially dependent children, your pension will probably die with you. Depending on your financial, family and personal circumstances and your state of health, making a Final Salary Pension Transfer may mean you can preserve a cash sum which can then be passed on to loved ones.
What you give up if you make a Final Salary Pension Transfer
- Guaranteed lifetime income: Your pension income will last as long as you do
- Spouse/Civil Partner/Dependants: Although schemes do vary, your pension will carry on paying an income to your spouse when you die. Your scheme documentation will tell you more
- Inflation protection: The spending power of your pension is protected to some degree
- Lower risk: Your pension income does not rely on stock market performance
- No decision making: Once your pension starts, you will not need to do anything and it will be paid like a salary
A Warning: Be ScamSmart – don’t fall victim to scams!
- Reject unexpected offers: Be wary of cold calls – they are completely illegal
- Know who you are dealing with: When it comes to transferring large sums of money from your pension, always deal with a registered, professional financial adviser
- Check any contact details you are given: Some scammers ‘clone’ legitimate financial advisers’ websites to pass themselves off as the real thing
- Don’t be rushed or pressured: When something sounds too good to be true, it probably is. There should never be a need to rush – financial advisers are paid to get things right for you and ensure you feel comfortable and in control
- Get impartial information: Don’t let someone tell you what to do and take time to understand your options
Creative will help you make the right decision with confidence
Important information about transferring your Final Salary Pension
- The transfer from a defined benefit pension plan is a highly complex process and is an irreversible action
- A final salary pension is more likely to be suitable than transferring your pension
- Transferring a final salary pension may have a detrimental effect on your retirement planning and is only suitable for some, not all persons