Flexibility introduced for taking pensions at retirement offers greater choice for many. However, deciding to transfer a pension with certain guarantees is not a decision to be taken lightly.
To protect you from unknowingly giving up potentially valuable guarantees in your existing pension arrangements, a proposed transfer of ‘safeguarded benefits’ worth more than £30,000 requires you to take professional advice from a suitably qualified person independent of the pension scheme.
Please note, it is not generally possible to transfer unfunded public sector schemes such as those provided for teachers, NHS employees, civil servants, armed forces, police and firefighters.
If you do not have any safeguarded benefits, then you are not required to take professional advice, although in most cases we would recommend that you do so, to ensure that the proposed transfer is in your best interests.
What are ‘safeguarded benefits’
Safeguarded benefits include any type of arrangement with a guarantee relating to the level of benefits at retirement, but not investment performance. Examples include Final Salary or Career Average schemes, or even older pension arrangements with a Guaranteed Annuity Rate. If safeguarded benefits are worth more than £30,000, advice must be taken before you can transfer these benefits to another scheme. This is the case whether benefits are to be taken from the new scheme immediately, or whether benefits under the new scheme will not be accessed for some time.
Transfer Value Analysis
Before a recommendation to transfer safeguarded benefits can be made, a pension transfer specialist must undertake an analysis. The purpose of this is to highlight the risks of transferring and the growth required by the transferred fund to provide the same benefits as those being given up. The only exception to this is where Defined Benefits are being taken at the scheme’s ‘normal retirement date’.
The results of this analysis, along with your own circumstances and objectives, will drive the advice to either remain in the existing scheme or to transfer.
Reviewing options at retirement
If you are approaching retirement then you may want to review the options available to you, rather than simply taking a pension from your existing scheme. Depending on your circumstances and health at the time, it can sometimes be possible to achieve a higher level of income by transferring a Defined Benefit pension at retirement.
An example of when this may be possible is where you have certain lifestyle factors that may result in a higher starting pension being paid, such as being a smoker, or you suffer from diabetes or high blood pressure. If you have a more serious medical history, such as previously having suffered a heart attack or cancer, the starting income can be higher still. Another example may be where you are single, and can secure a higher income by giving up the spouse’s pension provided to everyone automatically under your scheme.
It is important to note, however, that not all Defined Benefit schemes allow transfers at a normal retirement age. Some will not allow transfers within 12 months of this date.
Don’t forget about tax
With complete flexibility on how pensions can be accessed from age 55, many people want to transfer from their scheme and access a large lump sum up front. Aside from the other factors to consider, such as whether this transfer is good advice in the first place, it is vital that anyone considering such a move understands the potential tax implications:
- Income tax: withdrawals above the ‘pension commencement lump sum’ (usually 25% of the fund value) are taxed at your highest ‘marginal rate’. This can mean that a large lump sum taken from a pension arrangement can push you into the higher rate or even the additional rate tax bracket, meaning you could be losing up to 45% of your pension fund to income tax if taken as one lump sum.
- Capital gains tax: if money withdrawn from a pension is invested in, for example, property or shares outside of the pension, any future growth may be subject to capital gains tax.
- Inheritance tax: on death before age 75, there is no tax to pay on payments from a registered pension scheme. However, once money is removed from the pension it is brought into the estate for inheritance tax purposes.
Ensuring you make the right decisions
There can be times when a transfer from a Defined Benefit scheme can be the right decision to make. However, the decision on whether to transfer or not depends on a number of factors, such as the level of other savings and investments you have, your attitude to risk and capacity for loss, your family situation, level of income from other sources and short and longer term aims and objectives.
As pension transfer specialists, we can help you review existing arrangements, whatever form they take, and develop the most appropriate strategy for your future.