Final Salary Transfers Explained
A final salary transfer allows you to swap a future pension entitlement in a final salary, or defined benefit pension scheme for a cash sum that must be put into a registered pension scheme. The cash sum value is the ‘cash equivalent ’ of the pension income you leave behind, or put another way the amount of money today that would be notionally set aside in the scheme to meet your specific pension liabilities as they fall due.
If you accept a transfer value you will be ‘discharged’ from the pension scheme. This means the sum has been paid in lieu of benefits and you have no further claim on the scheme. The transaction is irreversible. You can’t buy your way back into the final salary scheme.
Not surprisingly then it’s a transaction which needs very careful consideration before acting on.
Six good reasons to take a look at your transfer options
- A final salary pension can be a significant financial asset. A transfer capitalises this and gives you control of the asset which can now be passed down through the generations without inheritance tax.
- With high transfer values being seen across the board, a good deal of investment risk associated with the transfer can be removed. On most transfer values, a 2% real investment return, after fees and inflation, will provide the same level of pension but with the potential for residual value to be passed on.
- Offers you complete flexibility over when and how much you draw from your pension which is in complete contrast to a fixed monthly pension income.
- Flexibility extends to taking a tax free cash lump sum as early as age 55 and deferring the taxed pension until it is needed. Did you know it is worth reviewing the value of your final salary pension before the age of 55?
- A transfer takes away the life expectancy gamble of a lifetime income.
- With this flexibility comes the ability to be tax efficient. In many scenarios there has been the ability to save tax when compared to the rigid final salary pension benefits. These could include:
- Higher tax free cash sum following the transfer.
- Ability to limit pension income to specific income tax bands.
- The opportunity to defer and minimise the impact of lifetime allowance (LTA) penalty tax charges
Three reasons why you may not want to transfer and the risks
- You are attracted to a secure lifetime income with limited risks and effort on your part.
- If the pension benefits offered by the scheme actually match the year by year income requirements you think you will need, there is little point transferring to simply try to replicate guaranteed benefits.
- If you have little or no experience looking after savings and don’t have good professional advice and fund management then inappropriate investments may put your pension fund at too much risk.
The information on this page is for information purposes only. The Raymond James East Yorkshire Branch is not authorised to offer Final Salary Pension Transfer advice, however, if this is something you that you are seeking further information on then please contact us and we can refer you to a firm who specialises in this.