A final salary pension was often seen as the ultimate gold plated retirement plan, with a guaranteed indexed linked income to be paid for life.
Historically, people generally worked for one company all of their working life, then retired at 65 and received their final salary pension.
When these pension schemes were set up 30-40 years ago and the scheme rules established, most people were only expected to survive for another 10-12 years.
As life expectancy has gradually increased, many pension schemes have struggled to keep their pension promises and it is becoming increasingly evident that many of these pensions aren’t so ‘guaranteed’.
This is just one of the reasons why people are looking to transfer their final salary pension away from their old employers.
Transferring your final salary pension to a SIPP puts you in control of your pension, and allows you to take advantage of the new pension freedoms that were introduced in 2015. We discuss this in more detail later on.
Transferring a final salary pension
There are a number of reasons why you may want to transfer a final salary pension;
Control and Flexibility of payments – a final salary pension cannot be changed once it is in payment, it is fixed for life.
Your state of health – a final salary pension is paid to you for the rest of your life. If you have a reduced life expectancy, you may only receive only a fraction of the value of your pension, or even just the contributions you’ve made to the scheme.
Your family and dependants – on your death, most final salary pensions will pay a reduced percentage of your pension to your spouse, often 50%. On your spouse’s death, the pension is normally lost and nothing is left for the rest of your family.
Your other sources of income – if the final salary pension only makes up a very small part of your income in retirement and you have other sources of retirement income, then the additional regular income from the final salary pension may not be required and may just end up pushing you into a higher tax bracket.
With increases in life expectancy, these guaranteed pensions are now having to be paid for longer and to more people than first planned. If the pension scheme has a large funding deficit and there are no longer any active contributions going into the scheme, there could be a danger of the scheme falling into the Pension Protection Fund (PPF).
The PPF is the lifeboat scheme for final salary pension schemes in the UK. If your pension scheme goes into the PPF, and you haven’t yet reached the scheme retirement age, your annual pension will be reduced to 90% of what you have built up to date.
Transfer your pension to a SIPP
Transferring the value of your final salary pension to a SIPP (Self Invested Personal Pension) enables you to gain control over various aspects of your pension.
You would be in control of when you take withdrawals, how much you take, and the tax structure of these payments. The pension freedoms introduced in 2015 now allow you complete flexibility over how you take the money out of your SIPP.
For example, you can take the 25% tax free amount all in one go as a lump sum, or you could take it in multiple payments over a number of years.
The pension freedoms also allow you to choose how much you withdraw from your SIPP, meaning you have some way of controlling how much tax you may pay. If you have other variable sources of income, withdrawals from the SIPP can be changed to so you don’t enter any unexpected tax bracket.
You will also get to decide how much risk you want to take with the investments in your pension, this is not decided by your old employer or anyone else.
If you’re a long way off retirement, you may choose to take a bit more risk as to give your pension the opportunity to grow, whereas if you’re approaching retirement, you may want to take less risk and protect what you have already built up. Importantly, the choice is yours.
When you pass away, the whole value of your SIPP can be passed on to your beneficiaries, and then they have control and can choose what to what to do with your pension; keep it invested, make some withdrawals or withdraw the whole lot.
Getting UK Pension transfer Advice
Once you have decided that you would like to proceed with the option of transferring your final salary pension to a SIPP, you will need to obtain advice from a financial adviser in the UK.
If you want to transfer a final salary pension to a flexible arrangement, such as a SIPP, it is now compulsory to obtain financial advice. The adviser needs to hold certain Pension Transfer qualifications, must be authorised and regulated by the Financial Conduct Authority in the UK and their firm must have permission from the FCA to advise on pension transfers.
Please get in touch if you have a final salary pension that you’re looking to transfer to a SIPP.