Your money-making expert. Financial journalist, TV and radio personality.
Changes to the rules around pensions in 2015 mean that people now have a much greater choice over what they do with their money than they did a few years ago. With a greater number of options emerging, the question of whether people should consider transferring their final salary pension is once again on the cards.
A final salary pension is a pension provided by an employer. In short, it guarantees a percentage of the final salary an employee has (or an average of the past few years’ salaries) for the rest of the holder’s life.
A final salary pension is often seen as the best type of pension to hold. This is because it can guarantee a level of security in later life that other types of pension might not. You’re guaranteed an income, at a set rate. Many schemes also offer their holders the chance to take out a lump sum when they retire, which can go towards any big plans or investments that might be desired.
Another benefit of final salary pensions is that their payments will often increase along with the rate of inflation.
So, why might I want to transfer money out of my final salary pension? There are a few reasons why this might actually work for you. Here are just a few of them…
You might receive a generous transfer value if you move to a different kind of scheme. A transfer value is the amount your pension pot could be worth if you transfer it to another provider. Recently, people have noticed that the value of their pot could increase by a whopping 30% if they decide to transfer. It’s certainly a strong incentive to switch. If the transfer value is above £30,000, you will need to seek financial advice before making the decision.
If you want greater freedom over your money and how it’s invested, you might also benefit from transferring out of your final salary pension. The nature of this kind of scheme means security and a set amount each month. However, what if you want to grow your pension pot or invest it elsewhere? Transferring it out of a final salary pension, whilst risky, allows you the flexibility to do this.
One option if you’re going down this route is to transfer into a personal pension scheme known as a Self-Invested Personal Pension (SIPP). This type of pension can offer a greater choice about how you manage your pot.
If you’ve got pension pots with different providers, for example if you’ve had a few different jobs at different companies, you might want to consolidate. This makes perfect sense, and can make managing your retirement income much more straightforward.
If you die whilst in receipt of a final salary pension, your beneficiaries won’t receive any of the money you’ve invested throughout your working life. Your pension pot will essentially disappear. Transfer to a different type of pension, though, and you may be able to pass on the proceeds to your loved ones.
If you do decide to transfer your final salary pension, you will of course risk losing the benefits that come with it. Here are a few things that you’ll want to consider before you make the decision to transfer.
The security that is offered with a final salary pension is one of the biggest benefits of it. If you’re going to pull your money or transfer it elsewhere, it’s a good idea to know exactly what you’re going to do with it and why. You’re taking a big risk on your future security if you choose to invest your pension pot with the hope of making it grow.
In fact, the risk of transferring your final salary pension is perceived as being so great that the Financial Conduct Authority actually has a stance that those offering advice in this area assume that it is not a good idea for their clients. If you do want to go down this route, financial advice is strongly advised.
Before you make the decision to transfer, make sure you’re fully aware of the benefits that come with your final salary pension. Aside from the guaranteed income, you might be in receipt of perks like life insurance. Make sure you’re fully aware of what you’ll lose if you go down an alternative route.
There are exceptions as to who can transfer money out of this kind of pension pot. You’re not eligible if you’ve worked in the public sector, so those who work for the NHS, for example, won’t be able to benefit from this.
You also can’t transfer out of a final salary pension that’s already paying out. This means that if this is something that you want to do you might need to make the decision relatively quickly – especially if you’re nearing retirement age.
There may also be restrictions on transferring this kind of pension to another company pension scheme. If this is what you plan to do, you will need to check with the new provider whether it’s allowed.
Have you made the decision to transfer money out of your final salary pension? We’d love to hear about it. Let us know over on the forums.
Need more info about your pension planning? Try these articles next.