If you have a preserved final salary pension, discover why NOW may be the best time ever to consider a final salary transfer.
"If I Had A Final Salary Pension, I’d Cash It In Now"
This Could Be The Last Gift You’ll Ever Get From The Bond Bull Market
So says Merryn Somerset Webb, editor-in-chief of MoneyWeek, in an article published in the Financial Times. Find out what's behind her thinking, and why you should review your final salary pension now.
If A Former Pensions Minister Cashes In Her Final Salary Pensions, Perhaps You Should Too!
“I don’t mind giving up some final salary, guaranteed pension income in exchange for what seems a very good-value offer,” Baroness Altmann said, as reported by The Telegraph.
What Would You Choose - £24k A Year From 65 Or £849k Now?
As lottery-sized sums are being offered to tempt savers out of final salary pensions, here's a balanced article from This Is Money which explores the subject in detail, including reasons why you may want to get your hands on your transfer value, and reasons why you're best sticking with your final salary pension.
With Some Of The Highest Final Salary Transfer Values Ever Seen, We're Delighted To Present An Article Explaining Why You Should Review Your Final Salary Pension Now, Even If You Looked At It Six Months Ago!
If you were asked to list your most valuable assets in descending order, how far down would the small, deferred, annual pension from your previous employer be?
Steve Petrie, Chartered Financial Planner
The Surprising Value Of A Final Salary Pension
The reality is a final salary pension is likely to be your second most valuable asset and for a significant number, it will be more valuable than your family home, sometimes by a considerable margin.
New pension freedom rules, which give you far greater flexibility over what you can do with your pension pot came into force on 6 April 2015 and this has led to a greater interest in what could be lying beneath the annual benefit statement that has typically been received and filed with apathy.
The answer will be revealed to you upon request of a Cash Equivalent Transfer Value (CETV) from your pension trustees.
The CETV is the cash sum the trustees are willing to transfer to a personal arrangement in your name in exchange for you giving up your pension rights with them.
How Much Could Your Final Salary Transfer Be Worth?
What we have been seeing is that all transfer values are not created equally. Generally speaking, the bigger your employer, the more generous your transfer value is likely to be. Large financial companies, banks, insurance companies and FTSE 100 members tend to offer the best transfer values.
One 54-year-old former employee of a large investment bank, who had a deferred pension of £4,500 per annum, was surprised to learn his CETV was in excess of £190,000.
A few years ago it would not have been as much, so why are we seeing such sizeable offers at the moment? The answer is down to the assumptions the trustees are using compared to what they have been historically. The three variables contributing to a CETV are inflation, annuity rates and investment returns.
In order to calculate a CETV, the trustees revalue the pension from date of leaving, to date of retirement, using inflation assumptions. They then capitalise the income using interest rates assumptions, and finally discount this back to the present day using investment return assumptions.
Indexation assumptions are restricted due to maximums and minimums legally bestowed on trustees, therefore lower assumed investment returns and annuity rates are driving these sizeable CETV values, as you can see from the table below. An increase in these assumptions could see transfer values start to fall again.
Final Salary Assumptions
Should You Consider A Final Salary Transfer?
There are many reasons to consider transferring a final salary pension. However, the starting point as pointed out by the FCA, is the default position should be to remain in the scheme.
The reality however, is that for certain people there are many good reasons why it will make sense to transfer. Even the Government, in its response to the Freedom And Choice In Pensions Consultation, noted:
... it is likely that some individuals will request transfers out of their defined benefit pensions, and for some individuals, this may be in their best interests. For example:
- if they are heavily in debt
- if they have a short life expectancy
- if they are unmarried and do not have dependants
- if they would prefer wealth to an income stream
You can read the full final salary consultation here.
I would add to the above:
- if you want to pass on the value of your pension to your spouse or children
- if you would like the opportunity for a larger tax free lump sum at retirement
- if you are concerned over the stability of your ex-employer
- if you want personal investment control and flexibility
Pension members are thankfully protected. The DWP has ensured no pension provider will accept a transfer from a final salary scheme where the member has not received advice from a suitably qualified Pension Transfer Specialist, and it is certainly not suitable for most.
We would always recommend that you seek independent financial advice before you take any action with your final salary pension scheme as any action taken is usually irrevocable and there are valuable benefits that would be lost on transfer.
What You Should Do About Your Final Salary Pension
If you haven't obtained a final salary transfer figure within the last six months, given the fact that final salary transfer values are currently running so high, it may be prudent to ask your trustees now, even if you are likely to fall into the "unsuitable category".
But don't leave it too long. As soon as there's a hint that interest rates are on the rise, your final salary transfer value is almost certain to be slashed immediately. And that could mean you miss out on tens of thousands of pounds of extra money.
There is no requirement to do anything once you receive your final salary transfer figure, and usually trustees will provide one CETV per annum at no cost to you. And the benefit of doing this...
You Will Know For Sure Where To Place Your Family Home On Your Asset List!
Final Salary Pension Review
If you'd like your final salary pension reviewed, we offer our Members a two stage service designed to minimise your costs. It's provided by a Financial Conduct Authority regulated firm of independent financial advisers that over the last 25 years has advised around 100,000 pension clients nearing or in retirement. It has experience of both SIPP and SSAS.
Stage One - Initial Analysis
You’ll be introduced to the specialist adviser for an initial conversation. The aim of the discussion is for you to explain what you’re hoping to achieve by transferring your final salary pension, and for the adviser to assess whether it’s likely to be appropriate, particularly if you’re intending to make your own investment decisions.
If you and the adviser are happy to proceed further, the adviser will invite you to email the transfer value report you’ll have received from your former employer containing full details about your scheme. It will be analysed in detail. A cashflow report will be produced showing how long your fund value might last, assuming a range of growth rates. Also produced will be a specific calculation of the amount of growth required within your new pension scheme to match the benefits you’ll be giving up by transferring your final salary pension.
The adviser will consider your objectives in detail and your attitude to risk, concluding whether or not to recommend the transfer of your final salary pension.
If the adviser is unwilling to recommend the transfer, you won’t be offered Stage Two, and you won't receive the report and calculation.
There is no charge for the Initial Analysis.
However, if you have exceptional circumstances, for example a pension transfer in connection with a divorce, there may be a charge which will be discussed and agreed with you beforehand.
Stage Two - Suitability Report And Certificate Recommending The Transfer
Providing the adviser is willing to recommend the transfer of your final salary pension, and you’d like to proceed, you’ll be asked to complete a detailed factfind, which will formally confirm the information you’ll have discussed with the adviser in Stage One. You will also be asked to complete a Client Agreement, confirming that you’ll pay the adviser’s fee.
When the adviser receives your completed documents, a Suitability Report will be produced together with a positive Certificate of Recommendation that you can present to the pension provider of your choice. Currently, almost all pension providers will only accept a transfer of a final salary pension on receipt of a positive recommendation from a suitably qualified Pension Transfer Specialist.
Should you wish to transfer your final salary pension to a SIPP or SSAS in order to make your own investment decisions, the adviser will offer comments on your investment choices. If you'd like the adviser to specifically recommend investments for you, this will be charged separately.
The adviser will take responsibility for organising your final salary pension transfer and ensuring the money arrives quickly and safely in your chosen pension scheme. Not only does this make the whole process incredibly easy and saves you time, it also means the adviser will not need to charge you VAT, a saving of 20%.
The cost of Stage Two is 1 per cent of your transfer value, subject to a minimum fee of £1,995 and a maximum fee of £7,500. Should you wish to retain as much as possible in your tax privileged pension fund, the fee can be paid by you personally. Alternatively, it might be possible for the fee to be paid from your pension fund. If this is your preferred option, you should check whether this is acceptable to your chosen pension provider.
The Stage Two cost for a second final salary pension is fixed at £1,000.
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As SIPPclub neither advises on, nor arranges, nor recommends specific investments or strategies, we're unable to say whether a SIPP or SSAS or any investment within it is right for you. Ultimately, it’s your money and your decision, and you should only proceed once you're satisfied you've undertaken sufficient due diligence. If you need advice, you should speak to your trusted adviser, or you could find a local adviser from Unbiased.co.uk. Alternatively, we'd be pleased to introduce to a suitably qualified independent financial adviser.
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