Posted on October 23rd, 2014 | Categories - Retirement
If you are a member of a Final Salary pension scheme you have probably been the envy of your friends for the past few years.
Whilst you have the knowledge that your pension is guaranteed, and will probably rise each year in line with inflation, they have had to put up with volatile stock markets and plummeting Annuity rates.
But this year the tables have turned, ‘Pensions Freedom’ will give everyone greater access to their pension pot; except of course those people with Final Salary pensions (which are also referred to as Defined Benefit pensions, but for the sake of brevity, and because the term is more widely used, we’ll carry on using the term, Final Salary).
So, if you’ve got a Final Salary pension, how can you take advantage of these new ‘freedoms’? Simple, ask your pension administrators for something called a Cash Equivalent Transfer Value or CETV for short and arrange the transfer to a suitable alternative arrangement.
Great, you can now take advantage of the new ‘Pension Freedoms’, but hold on, will you actually be better off? Will you get a higher income in retirement? Will the new pension be better?
Almost definitely not; here are six reasons why transferring your Final Salary pension is probably a mistake.
#1: You will be giving up a guaranteed income
The income from Final Salary pensions is guaranteed to be paid to you each and every year of your retirement; which will probably continue to your spouse after you have died.
However, transferring your Final Salary pension means your retirement income will depend on how the new investment performs and possibly Annuity rates.
The guarantees offered by a Final Salary pension are hugely valuable and almost impossible to replace.
#2: Did we mention that income is inflation proofed?
Not only is the income from a Final Salary pension guaranteed, in almost all cases it will rise each year to protect you against inflation.
Inflation is one of the enemies of people not in Final Salary schemes. You could be retired for 20 or even 30 years, over that period prices will rise significantly, if you transfer out of your Final Salary scheme it will be harder to make ends meet as inflation bites.
#3: You will be worse off in retirement
There’s not much to add, it’s almost certain that your income in retirement will be lower if you transfer from a Final Salary scheme to a Money Purchase arrangement.
#4: Don’t believe the hype about alternative investments
We’ve seen a growing number of people convinced to transfer their Final Salary pension into a SIPP (Self-Invested Personal Pension) or a SSAS (Small Self-Administered Scheme) and then make risky investments into assets such as holiday homes, overseas property, storage units even bamboo and burial plots!
Don’t be taken in by the people, who are often unqualified and unregulated, peddling such schemes.
No matter what promises they make, remember that you will be giving up a guaranteed index linked pension, for something which is probably too good to be true.
#5: You could lose your entire pension
We’ve seen occasions when investors have transferred from a Final Salary scheme only to make risky investments and then lose their entire pension fund.
Giving up a guaranteed index linked pension, in the hope of large returns from a ‘sexy’ investment, is frankly a lottery.
In fact, we’d go even further, in all our years of advising clients we’ve not seen a single unregulated investment provide the returns which were originally promised.
#6: Worried about your dependents? Buy life insurance!
The recent announcement that the ‘death tax’ on pensions will be cut from April 2015 caught most people by surprise. It also left some members of Final Salary pensions angry that they would miss out on the opportunity of leaving their children or grandchildren a tax-free lump sum when they die.
First things first, let’s clear up some confusion; the lump sum is only tax-free if death occurs before the age of 75. Statistically most of us will live past 75, and any lump sums left after this age will still be taxed, albeit at a lower rate than the current 55%.
Secondly, it’s unlikely that leaving a lump sum on your death is a good enough reason to give up a guaranteed, index linked income. Sticking with the Final Salary pension and buying life insurance is probably a far better bet.
Don’t be envious, be grateful
The new ‘Pension Freedoms’ might look attractive and an alternative investment promising huge returns could be tempting.
But don’t be envious of your friends and their new found ‘Pensions Freedom’. Despite all the talk of lump sums, Lamborghinis and pensions as your bank account, you are probably far better off with your Final Salary pension.
Be very wary of giving it up and treat anyone who suggests otherwise with a large amount of scepticism.
We’re here to help
If you have been advised to transfer out of your Final Salary pension and would like a second opinion we’re here to help.
Call one of our independent pension experts today on 0115 933 8433 or complete our online enquiry form which can be found by clicking here.