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Guide to UK Final Salary Pension Transfers

A Guide To:
Pension Transfers

As many people are considering whether they should transfer their pension right now W1 Investment Group have produced this simple guide to explain some of the issues behind pension transfers.

This brochure is only intended to provide very general background information on the subject of pension transfers for non-UK residents outside the UK. W1 Investment Group will be happy to provide you with individual professional financial advice on request.

First, What Kind Of Pension Do You Have ?

Most pensions are one of two different types. Here is how they differ:

Defined Contribution Pensions

Also known as: Personal Pensions, Stakeholder Pensions, Self Invested Personal Pensions (SIPPs).

Distinguishing feature: Known as defined contribution pensions because the only thing that is guaranteed is the amount you contribute.

How they work: You or your employer contribute and the money is invested. Depending on the scheme you may have a limited or unlimited investment panel to choose from. The pension you receive depends on only two things: How much you/your employer contribute and how much investment growth (after charges) there is.

Many expats have several such pensions from different employers. Consolidating them into one overall pension can be worth considering.

Defined Benefit Pensions

Also known as: Final Salary Pensions.

Distinguishing feature: Known as defined benefit pensions because the benefits you receive in retirement are defined by the rules of the scheme.

How they work: Most schemes are calculated on a 60th or 80th basis, ie. you will receive 1/60th or 1/80th of your final salary for each year of employment.

For Example: David Matthews has worked at XYZ Company for 20 years and his pension works on a 60th basis. In his final year his income was £50,000. So: 20/60 = 0.33. £50,000 x 0.33 = £16,666.66.

David is 55, has 10 years until retirement and the scheme rules dictate his benefits will increase in line with inflation. If we assume 3% inflation over the next 10 years his pension at 65 will be approx. £22,333.32. This will then increase in line with inflation, or the scheme rules, throughout retirement.

Very importantly, the scheme rules dictate that if David dies outside five years after retirement his spouse will receive only 50% of his pension. On her death there will be no residual value to their children (unless they are under 23 and in full time education).

This is one of the reasons that final salary pension transfers have become increasingly popular. 
2015 Was A Milestone Year For Pensions, But Why ?

You may know that new UK Government rules have changed how pensions work, but do you know exactly how?

These are the most important things to know:

Death benefits have changed: The new rules state that if you have a defined contribution pension the entire value will pass to your family if you die before age 75. If you die afterwards they will still receive it, but will pay their marginal rate of tax on any withdrawals.

This change has made defined contribution pensions much more attractive than previously.

There is now much more flexibility: Prior to 2015 defined contributions pension holders were, in effect, saving and investing to buy a replica of a final salary scheme in the form of an annuity. Income could only be taken according to Government Actuarial Department or GAD rates.

The new rules changed this completely, together with the perceived value of final salary pensions. Instead of a set income you now have access to a pot of wealth and some flexibility in how to use it. For example, you can draw down some of your pension or take more income in the early years of retirement if you wish to.

How Are Final Salary Schemes Funded ….

And Why Is This a Problem ?  

Final salary schemes are funded by either employees (the members) or the company or typically both. Contributions are invested for growth to pay the future pensions.

In recent years final salary pension schemes have hit the headlines due to concern over the funding levels of some schemes.

If the scheme is 100% funded, or in surplus, then it has enough assets to pay the pensions promised. However, if the scheme is in deficit it does not. If these funds are not replaced by either additional contributions or improved investment returns the promised pensions can’t be paid. Unfortunately some schemes are so underfunded that the deficit in the pension scheme is actually bigger than the value of the company.

Some of the numbers regarding funding levels of final salary schemes are very concerning. For example, in 2016 JLT Employee Benefits estimated that the deficit in the FTSE 100 final salary pensions amounted to £117 billion.    

Will The Pension Protection Fund Bail You Out? When a pension scheme can’t pay its pensioners the Pension Protection Fund takes over. The PPF is funded by a levy on final salary pension providers.

The problem here is that if pension deficits are not tackled and there is large scale default by final salary pension schemes the funding of the PPF will dramatically fall just as the payments it has to make dramatically rise. In these circumstances there are no clear answers as to what would happen.

In a 2015 interview with the ‘Daily Telegraph’ Alan Rubenstein, Chief Executive of the PPF, said: “It is misleading to allow people to expect promised pensions when in fact there is only money enough to pay about 60% of those pensions (should they be cashed in today) and where nothing is being done about the shortfall.”

Is Your Scheme In Surplus …. Or Deficit?

Bearing in mind the problem of pension deficits we advise everyone who has a final salary pension scheme to determine whether their scheme is in surplus or deficit as soon as possible.

W1 Investment Group can help you find out whether your scheme is in surplus or deficit. For more information please email us at info@w1invest.com.

5 Reasons To Consider Transferring a Defined Benefits Pension

Here are some reasons why transferring a defined benefits pension may be attractive:

  • If you would like your spouse to continue receiving your full pension, and/or to leave your family more money, after your death.
  • If your transfer value is very high. For example, while transfer values of 20 times annual income were once typical transfer values of 30 times are now usual. This means the growth required to provide the exact same income and leave a substantial pot to your family can be minimal.
  • When you transfer to a defined contributions pension your 25% tax free pension commencement lump sum is available at age 55. You might decide to reinvest this and defer taking the taxable income until later.
  • Transferring your defined benefit pension will put you in charge of when (after age 55) and how much of your pension you access to suit your own needs.
  • If you consider yourself to be independently wealthy outside of your pension then a transfer removes the life expectancy ‘gamble’. It can allow more effective estate planning and enable you to leave more to your family.

Why Are Transfer Values So Attractive Right Now ?

The most important factor affecting transfer value is UK gilt yields. When yields are low the scheme has to set aside much more money to guarantee the income.

For example: If gilt yields are 5% (approx.) as they were in 2008 and the scheme had to provide a pension of £10,000 they might need to set aside roughly £200,000 to cover that liability. 5% of £200,000 is £10,000 per year.

If gilt yields are 2% as they are currently (approx.) the scheme would have to set aside roughly £500,000 to cover this liability. 2% of £500,000 is £10,000 per year.

How To Find Out If a Transfer Could Benefit You

To find out if a pensions transfer could benefit you simply contact your pension administrator and request a ‘cash equivalent transfer value’. (We can do this on your behalf if you give us permission.)

This will indicate what you are likely to receive if you don’t transfer. It will also show the amount at which the scheme will effectively buy you out of your promised income.

We are then in a position to advise you whether a transfer is appropriate for you and your circumstances.

Please note this sum cannot be just taken and will need to be placed with another UK registered and approved pension scheme of your choice.

When SHOULDN’T You Transfer Your Pension ?

Every situation is different and so it is essential to take professional advice. However, here are some circumstances when transferring your final salary pension may not be advisable:

  • If your final salary pension will be your only income in retirement and you have no other significant wealth.
  • If the transfer value is poor in relation to the deferred benefits offered.
  • If your tolerance to investment risk is low.
  • If you have no beneficiaries to leave your remaining pension to on death, and/or flexibility of income in retirement isn’t important to you.

More Information 

We hope this guide has provided you with some useful background information on the subject of pension transfers. However, we would encourage everyone to take individual professional advice on their current pension arrangements, and find out if their pension is likely to provide them with the income they need in retirement or not.

If you would like to find out more about the pension transfer advice service that we can provide – or just find out more about W1 Investment Group – please email us at info@w1invest.com.

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