MPA Final Salary Transfers
Since 2015 there has been a legal requirement for anyone with a final salary pension transfer worth in excess of £30,000 to seek qualified advice.
With interest rates at historic lows, transfer values have been at historic highs, due to the way they are calculated, and many companies are encouraging deferred members to transfer to reduce their long term liabilities. This is a very complex area and Independent professional advice is more vital than ever in optimising this crucial area of long-term financial planning.
Phil McGovern, Managing Director of MPA Financial Management is a qualified Pension Transfer Specialist. He says: ‘We were interested to read a quote in the FT adviser by pensions expert Henry Tapper:
“The market for advice is forming around availability of advisers not around suitability.”
We are proud that without promoting this service most of our work is referred from other happy clients and other financial advisers, making MPA a trusted pair of hands in the industry.’
At MPA we are experts in the field of Final Pension Transfers and run our own analysis system to help in the evaluation of whether a transfer is in your interests.
The advantages of having a final salary pension are:
- Guaranteed income for life
- Guaranteed death benefits
- Guaranteed increases in payment throughout life
- No involvement – apart from a couple of months prior to retirement, you decide the maximum income or reduced income and tax-free cash lump sum
- Great for individuals who want maximum guarantees with little risk and no involvement
Therefore, stay in your final salary pension if you want a guaranteed income for life, no involvement and little risk*.
The regulator, The Financial Conduct Authority (FCA) states that members should be wary of transferring their DB scheme to a new flexible pension and in most circumstances they will be better served by leaving it where it is.
However, the drawbacks of a final salary pension are:
- For anyone retiring early there can be significant penalties.
- On death, your pension generally reduces by 50% if you are married. If you are not married and have no dependents it dies with you
- The value of the pension cannot be passed to non dependent family.
- It may not be possible to access your tax free cash now and defer the pension.
Therefore, you could consider transferring if you would like to retire early or leave a legacy to pass down, have shortened life expectancy or have debt to pay off. With careful tax planning your money could be passed down generations without inheritance tax.
2015 Pension reforms
The 2015 pension reforms have provided more choice in how pension savings can be used in retirement. With the pension freedoms you can access cash as early as 55, which may help you pay off a mortgage or help a child buy their first property.
You have control as to how much you take from your pension account. So, for example, you could take out money to splash out on a once in a lifetime holiday or a sports car, rather than being restricted by an annual income through an annuity.
The Chancellor, George Osborne, started a pension revolution in 2015 when he announced the introduction of the new pension freedoms. The rule changes shone a spotlight on annuities as the traditional way to generate income in retirement leading to a dramatic impact on annuity sales.
Annuity costs have soared in the last twenty years as risk free investment returns have fallen and life expectancy has risen. Annuities are effectively a very expensive and inflexible insurance policy against living beyond normal life expectancy and to receive guaranteed income payments.
Annuities lock in current interest rates and lock out further investment opportunity or control over your capital. They look increasingly outmoded for modern retirement which can extend over 30 years with periods of very different income and capital requirements.
If you have a defined benefit pension due to be payable, you effectively own a deferred annuity. If you don’t need insurance against a long life or to get guaranteed income payments, then a defined benefit transfer gives you the option to cash out of these expensive insurances and take advantage of the new flexible pension freedom rules.
As the cost of annuities has soared so has the cash value of transfer offers. So for the very same reasons individuals have all but stopped buying annuities, more and more deferred members of defined benefit schemes will find the transfer route attractive.
High transfer values
While transfer values are high, the same level of pension is achievable, even with the associated risks that investment incurs. For some schemes transfer values relative to future pension entitlements are currently very high; this is due to exceptionally low gilt yields. The situation is unlikely to last and therefore the transfer values will become less attractive.
Inheritance tax friendly
Planning around your personal circumstances can allow you to maximise your income. Tax savings can come from:
- A larger tax-free cash sum
- Flexibleincome withdrawals to minimise tax
- Deferring withdrawals to pass value to the next generation
Final salary pensions – how to work out your income
If you’ve saved into a final salary pension scheme during your career, it will provide you an income for your retirement based on three key factors:
- The number of years you have paid into the scheme.
- Your salary – this might be your final salary when you retire or your average salary across your career.
- Your pension scheme’s ‘accrual rate’ – this is a formula that’s used to calculate your final retirement income. This ‘accrual rate’ is a fraction of your salary (usually 1/60th or 1/80th) and is multiplied by the number of years you’ve been in the scheme.
Transferring your pension
You may need to consider whether it would be worthwhile transferring your pension assets or surrendering your existing benefits in exchange for cash to be invested elsewhere. We can help you understand the complexities of Cash Equivalent Transfer Value (CETV) and weigh up the comparative attractions of guaranteed income levels and options with higher risk.
According to the Pension Advisory Service:
‘You can normally transfer pension benefits held in a scheme that you have left to a new pension scheme at any time up to, generally, one year before the date when you are expected to start taking retirement benefits. In some circumstances, you can also transfer after you have started to receive retirement benefits, but this is not common.
The first step is to find out your cash equivalent transfer value (CETV), also known as the transfer value, by asking your scheme administrator or pension provider. They may ask you to do this in writing and may have a form that you need to complete.’
You can read more about transferring to another UK pension scheme at: https://www.pensionsadvisoryservice.org.uk/about-pensions/when-things-change/uk-transfers
The transfer value (or CETV) is the amount of money which a defined benefit scheme will pay to another pension arrangement in lieu of benefits which have accrued to a member. A key part of Pension Transfers specialist advice is to assess whether this is a fair payment and also what income it can provide if invested.
The reason people consider transferring their final salary scheme are varied but could be as follows:
- Early access to the tax-free cash to settle debt
- Lump sum death benefits are greater in a transfer and can be paid to extended family including children and grandchildren and even charities.
- Want to retire early
- Investments can be passed onto family members on death whereas the pension may die with you
Transferring should be considered when:
- The transfer value represents fair or generous value as opposed to the pension benefits which have been forfeited
- You are comfortable looking after the investable income
- You can cope with lower income later in life if the fund runs down
- You want flexibility to access benefits to suit your needs and become responsible for your own future
If you are considering transferring your final salary pension, remember this is a very complex area and the default position should always be to leave the pension as it is.
That said, Phil McGovern is a long term expert in this field and he will be more than happy to advise you of the merits and disadvantages of the transfer. Phil can be contacted at firstname.lastname@example.org for further details