Final Salary Scheme’s
A recent article in an industry publication indicated that as April approaches there may be a “bottle neck” of clients looking to exit their Final salary Pension Scheme in favour of a transfer to a Personal Pension to take advantage of the new Pension Freedoms that start in April 2015.
The bottle neck will be caused by the volume of consumers likely to be looking at transferring and the low number of Financial Planners being not only qualified but experienced to handle these types of complex requests.
There will undoubtedly be clients who are in deferred private sector Final Salary Pensions who wish to look to transfer for these freedoms, but it is unlikely that, when they understand the full extent of the guaranteed benefits that will be lost that staying in the scheme will be the best option for the majority of consumers.
However, as an adviser that is qualified to advise on this type of request, it is important to know that there are still, albeit, rare occasions that when looking to take immediate retirement benefits that a transfer may be recommendable.
- Consumers who are in poor health could benefit from an enhanced annuity that provides a higher guaranteed income on a like for like basis than the Final Salary benefit given up.
- Single retirees that do not need to allow for a spouse or dependants pension that is unavoidable in the Final Salary scheme may again be able to take an annuity on a single life basis that is higher than the Final salary offer.
- Retirees taking retirement earlier than the scheme stated retirement age, may be able to secure an annuity on a like for like basis that is higher than the scheme, due to the fact that the scheme would actuarially reduce benefits due to the early payment.
The above possible occasions allied to the fact that transfer values are particularly high at present (seen in our research) could mean a transfer is recommendable. Due to this I feel that a cash equivalent transfer value (CETV) should be requested at all times when a retiree is looking to take retirement benefits to ensure that an annuity on the same basis could not provide a similar or higher yearly income.
This is further emphasised by the fact that the new death benefits brought about by the Pension reforms afford a spouses/dependants benefit that would not be liable to tax should the deceased have died before age 75. This is not the case in a Final Salary pension where any spouses pension is still taxed as earned income and generally only the spouse can benefit (should no dependants be under 23 years of age) This has made the annuity a viable comparison to the Final Salary Scheme Pension, though as suggested earlier, it is still likely that on a purely income basis, that the guaranteed pension offered by the Final Salary Scheme will be of higher benefit, in all but certain circumstances (see above bullet points)