What it could mean when you swap your final salary scheme
Swapping final salary pension schemes for cash made headlines as transfer offers reached record highs last September and FTSE 100 executives and the ex-Pensions Minister joined the stampede.
Those soaring values have now peaked, but many people, including our clients, are still finding cashing in all or part of a pension to be a very rewarding option, or even the answer to an emergency.
Take the case of our client who suddenly fell ill abroad.
He had travel insurance and received all the necessary medical treatment.
But now that he's home, the insurers are trying to wriggle out of some of the costs.
Our client could be liable for a large medical bill. The stress hasn't helped his health.
Because our client had been deemed unfit for work on health grounds, he no longer receives a regular salary.
A chat about his options revealed that he had an old final salary scheme with an employer whose financial future wasn't entirely secure.
Having looked at all the other options, we advised him to transfer his pension out of that scheme, giving access to 25% of the fund value virtually straight away.
He was able to bank sufficient money should the legal case with the insurance company be unsuccessful.
The transfer also helped ensure financial security for family in the event of my client's death because his full pension fund would be available tax free.
Transfer gold rush
Final salary, or defined benefit pensions, are considered 'gold plated' because they promise to pay a secure, index-linked income for life, based on final or career-average salary.
For most savers, DB pensions deliver highly valuable benefits worth keeping, but anyone concerned about their former employer or needing access to funds now, to invest, spend, or improve cash flow, will be tempted to swap the pension for a cash transfer value while values remain elevated.
Those taking a transfer must first put the cash in another pension product such as a self-invested personal pension (Sipp). New freedoms for personal pensions have made defined contribution pensions far more user-friendly.
So, while our clients who opt to transfer give up the security of a guaranteed, usually index-linked, income for life (provided their company scheme remains viable), they gain control over the investment and drawdown of their capital.
Further, recent pension reforms allow any surplus to be passed on to family tax-free if the individual dies before age 75.
Making sense of the options
In a complex landscape, our role at Richmond Wealth is to help clients take advantage of the current opportunity.
Together we weigh up the pros and cons, assess our client's financial standing, ensure the swap goes smoothly and explore how best to use the funds.
This is where our expertise and our independence are critical to provide objective, impartial, practical guidance in our client's best interests.
Which could mean remaining in an existing pension scheme or going for gold. Recently the OECD warned that UK savers were at greater risk of running out of money in later life if they did not ensure a secure retirement income.
As the next stage of life approaches, it is wise, as part of your financial planning, to review the pension options. Especially if your final salary scheme has a doubtful future or a transfer value that is too good to resist.
- Chris Bryans is chief executive of Richmond Wealth, an independent financial services consultancy in Holywood. For more information, visit www.richmondwealth.co.uk