Your Finances Under Control
Interest in transferring from defined benefit or final salary pensions to defined contribution pensions is increasing, writes Steve Bayes trusted adviser of Ludlow Wealth Management. Photography: Robin Lyndon
The main factors driving this are new pension freedoms and bigger transfer values. Pension freedoms provide the ability to control your own pension, take out money when it suits you and leave an inheritance to the next generation.
Transfer values have risen because a key factor in their calculation is long-term interest rates, now near historic low levels, although other factors do impact transfer values.
In isolation, high transfer values and pension freedoms don’t make transferring the right thing to do. Many people consider this option, but decide to stay put.
Pros
1. Flexibility
Pension freedoms give you much greater flexibility and control over your pension savings. You can: access your pension at age 55, buy a guaranteed lifetime income (annuity); or you can take regular/flexible withdrawals as and when suits.
2. A higher pension
Transfer values are calculated based upon the average person in a pension scheme and according to the standard benefits payable. Therefore, people who are in poor health or who don’t have a partner may be able to buy an annuity from an insurance company that is higher than their promised defined benefit pension.
3. Inheritance
If you die when in receipt of a defined benefit pension, the money available to others will depend upon the rules of your specific pension scheme, but most include a reduced pension paid to a spouse or partner until their eventual death. If you transfer your money to a defined contribution pension, and die before age 75, the whole remaining fund can usually be passed on free of tax. If you die on or after age 75 any money passed on is taxed at the beneficiary’s marginal rate of income tax or you can leave the remainder to charity tax-free.
Cons
1. Income certainty
With a defined benefit pension, the worry about whether you will run out of money or live longer than average is someone else’s problem. This certainty brings many people considerable peace of mind.
2. Investment risk
In a defined benefit pension the risk associated with managing your money sits with the pension scheme. If you transfer out, the risk that your investments can fall in value belongs to you. If you’re not willing to take investment risk, then transferring out may not be for you.
3. Price rises
Defined benefit pension rules vary by scheme. Many, however, pay an income in retirement that keeps pace with price rises. This is very valuable in a high inflation environment. By transferring away, the responsibility for your income keeping pace with prices transfers from your pension scheme to you.
The decision to transfer is not black and white, and should be based on your own circumstances and needs.
Not only can a financial adviser help you with the transfer decision, they can also help you manage your savings and investments on an ongoing basis, whether you decide to transfer or not.
Ludlow Wealth Management
172 Lord Street
Southport PR9 0QA
01704 500324
www.ludco.co.uk
