Whether or not to transfer out of a final salary pension scheme is one of the biggest financial decisions of your life.
When is or isn’t is right to move out of a ‘final salary’ pension scheme?
If you are a member of a company’s ‘final salary’ pension cheme (also known as a ‘defined benefit’ or ‘occupational’ pension), whether you should stay with your scheme or take a lump sum transfer out of it requires detailed and expert analysis of your unique circumstances.
These four questions are a good way to start thinking about this critical decision, before if necessary, contacting a financial adviser who should have a specialised qualification to allow them to offer advice in this area:
1. Are you still an active member of the scheme? (i.e. are you, and your company, still contributing to the scheme?)
a. Yes – It is unusual to recommend leaving a scheme where you are still accruing benefits but exceptional circumstances have been known, for example:
i. if the scheme is under-funded with no prospect of recovery.
ii. if you are terminally ill or have serious health issues where the death benefits are more important to you.
b. No – If you are what’s classed as a “deferred member” then it might be worth exploring further what your entitlements are and how these fit in with your goals and objectives.
2. Are you at, or close to, retirement?
a. Yes – You are at, or getting close to, retirement and as such you should consider what your entitlements are and how these fit in with your goals and objectives.
b. No – You still have a longer time horizon to taking benefits but that shouldn’t stop your overall retirement goals and objectives being considered further.
3. Do you need a lump sum from your pension and are you over 55?
a. Yes – Your scheme may be able to pay this for you but it may also be possible to get a higher lump sum on transfer away. This should be explored further
b. No – Your scheme should allow you to choose not to take a lump sum, but your options should be explored further at this point
4. Do you need a varying level of income from your pension?
a. Yes – Your scheme may not allow this and the suitability of taking a fixed income should be reviewed
b. No – Your scheme will pay you a known and guaranteed income for life and as such may continue to be the most suitable source of income for you in retirement.
Don’t forget that the decision about whether to transfer out or not is just the start of the journey. Should you decide to move away, you will now have the responsibility for your own pension income for life. This is when a relationship with a financial adviser you can trust really is essential.
