Time to Reconsider Pension Transfers
Many individuals nowadays tend to have what are known as money purchase pension arrangements, where the individual tends to take the investment risk. These
are often set up by the individual or their employer. The structure tends to suit employers as if they make contributions they have a known, controllable
Historically however, the favoured form of pension scheme tended to be the Final Salary Scheme where the employer essentially took the investment risk and the ultimate benefits depended on the length of service and the salary at the date of leaving. A great number of people now have preserved pension benefits under such arrangements where they have subsequently moved employment and the question often arises what to do with such accumulated pension benefits.
The traditional view has tended to be that on balance it has been better to leave such scheme benefits untouched. However, recently as a result of low interest rates and projected lower investment returns the transfer values available from such schemes have increased and for many the option to consider a transfer to another alternative scheme has become much more attractive. Indeed depending on the actual terms offered by the original scheme the investment return required to match the original benefits on transfer has been fairly modest often in the region of 2% - 3% real investment return after taking account of fees and charges.
Naturally no matter how attractive the transfer value available is and indeed how achievable the return required is, a fundamental issue remains why such a transfer might be in the long term best interests of the individual. The answer often lies in the idea of taking control of one’s own pension and decided how and when benefits are taken.
Sometimes benefits can be taken earlier than the main scheme and the structure of the way in which benefits can be taken can be matched to an individual’s specific requirements. For example some people might only need the tax free cash entitlement but no actual income, whilst others might prefer a combination of tax free cash and regular income to manage their tax liabilities. In taking control clients can also determine what benefits they might wish to include whereas under Final Salary Schemes benefits are provided in a prescribed form and may for example cost in spouses pension benefits even when the pension plan holder is single.
Perhaps one of the biggest motivators in considering transfers is the idea that the plan benefits can be passed down the family line potentially as an intact pension for children and outside of the estate for inheritance tax purposes. This can account for substantial tax savings for families whilst offering complete flexibility during the lifetime of the pension plan holder. Under the new pension freedoms the possibility would even exist to draw the whole pension fund as a lump sum although the tax consequences in doing so are often prohibitive.
What is true to say is that whilst Final Salary Scheme transfers may look attractive it is vitally important to take truly independent advice in what is a potentially very complex area of financial planning.
By Sabre Financial | Wednesday, November 09, 2016