As pension freedom encourages an increasing number of people to think about how best to realise value from their pension pots, now could be the time for them and their advisers to consider transferring out of a defined benefit (DB) pension scheme, according to Matthew Brown, private client partner at Thomas Miller Investment.
Transfer values from DB pension schemes have been hitting historic highs following further reduction in gilt yields over much of this year, says Brown, meaning advisers and their clients would do well to explore all their options – including whether transferring a final salary scheme may be beneficial to their long-term planning.
“A final salary pension scheme has long been regarded as the golden route to a comfortable retirement and for most this is still very much the case,” adds Brown. “That said, some are now thinking the previously unthinkable.
“Deferred scheme members of traditional final salary pension schemes have been afforded an opportunity to transfer funds to more flexible pension arrangements at more favourable rates.”
Brown points out that the value offered for transferring out of a final salary pension is higher when gilt yields and UK interest rates are low, because falling gilt yields increase the notional cost for scheme sponsors providing benefits, in turn prompting them to offer improved transfer values to members.
Swapping a guaranteed pension income for life for an invested personal pension account will not be the right decision for too many people he warns but adds: “For some, a transfer will make a lot of sense – effectively giving control of what is a significant asset. More often than not, it will still be right for the individual to remain in the scheme but there are compelling reasons to at least consider a transfer.
“The advent of pension freedom, whereby a pension holder and ultimately their beneficiaries can freely access their pension funds, has seen a surge in those considering this option. This is particularly the case for those with some element of guaranteed income who would like to take advantages of the new rules for some of their other pensions.”
According to Brown, six of the most common reasons to consider a transfer are:
1. Health concerns: It could take 20 years or more to receive the transfer value in equivalent income.
2. Death benefits: Transferred funds are likely to offer much better income to spouses as they will not see income automatically reduced. “Generally with a DB Scheme, no benefit is left for future generations who can again benefit from transferred funds,” says Brown.
3. Access: Full access is available to the fund at any time and, for some, says Brown, the ability to choose when to take income can have tax planning benefits.
4. Inheritance tax (IHT): Conversely, Brown adds, for some the fund can be left untouched as a very efficient IHT vehicle.
5. Tax-free cash: Tax-free cash amounts can be higher.
6. Investment environment: Investment returns required to replicate the guaranteed income foregone have often fallen to acceptable levels as transfer values have increased.
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