The Pension freedom rules were implemented in April 2015 with the aim of making pensions more attractive by creating a more flexible way to access the benefits. One of the unintended consequences is that people with Defined Benefit (Final Salary) pensions are realising the only way of accessing the increased flexibility is to transfer their Defined Benefit pension to a personal pension. People aged over 55 can then get immediate flexible access to their funds.
According to a recent Financial Conduct Authority (FCA) survey, requests from people looking to transfer Defined Benefit pensions has tripled since the new rules were announced. At Blue Sky, we have also seen an increase in people investigating the possibility of a transfer.
Whilst the increased flexibility is attractive and could provide additional capital for earlier retirement, people need to be aware there are also clear downsides to transferring. The main one being that through a Defined Benefit Scheme, there is normally a guaranteed, inflation-proofed income, which will be paid for the rest of the recipient’s life. Normally there will also be a percentage of the income payable to the individual’s spouse on the death of the main recipient. This security should not be underestimated as, with life expectancy increasing, knowing this income is guaranteed creates a level of comfort.
The main reason, we find, people are looking to transfer is to do with the death benefits. Whilst we know the income is fixed for life in a Defined Benefit environment, the transfer value that would be available in a Personal Pension could be paid out as a lump sum, or used to provide an income, not only for the spouse but also to nominated beneficiaries. Also, within the Defined Benefit scheme, should an individual and spouse pass away five to ten years after retirement, the remaining fund would be retained within the scheme and not paid to any beneficiaries. This loss of benefit is a concern for many.
The transfer value can also be quite attractive, with current values currently tending to be somewhere between 20 times and 30 times the value of the deferred pension.
At Blue Sky, we are happy to talk about the pros and cons of transferring but, before we look in any detail at the transfer advice, we insist that the client goes through our Comprehensive Financial Planning Programme first. This will allow us to fully understand the client’s financial position and model various scenarios to see how the decision to transfer may alter their future. Only when we are confident we have investigated all angles and that all parties are comfortable with the outcome will we start to look at transferring. This position ensures that our clients are fully informed of the variables and are not going to rush into any decision blind folded! This is a once only decision – once transferred to a personal pension, the money cannot be transferred back to the Defined Benefit scheme.
As we often say; “if you are planning to invest, don’t…invest in planning first.” You only retire once, so make sure you make the right decision and then you can live the rest of your life, safe in the knowledge that, if you follow the plan, you will never run out of money.