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Transferring your final salary pension: the good, the bad & the ugly

What on earth has happened? The gilt-edged final salary pension scheme used to be untouchable. Once upon a time, if it was offered, a final salary pension was one of the main reasons to work for an employer. However, since the new pension freedoms have arrived in town, people are almost being rounded up and advised to transfer out of these schemes in droves. A casual observer could be excused for thinking that we’ve returned to the lawless wild west; the gunslingers are after the gold!

The recent pension freedoms have been engineered by the Government to make it more attractive for individuals to transfer from the safety of final salary pension schemes. There are varying opinions on whether this is really for the good or bad; but let us consider the very ugly consequences if all goes horribly wrong.

The good

  • pass the whole fund to your family on death (final salary benefits typically die with you, or are at best lousy if you die early)
  • no paying for a spouse’s pension if you’re single
  • flexibility to withdraw money as you need, either to change income levels, or take lump sums from time to time
  • control the amount you take as a pension to suit your tax rate
  • if you transfer to a personal pension, you get 25% as tax-free cash and can take this and your pension at any time from age 55 – they don’t have to be taken together
  • if the final salary scheme goes bust (as many of them are in deficit), then you’ve got your money out; this is very unlikely, but it is still a possibility
    • The Pensions Protection Fund (PPF) is the ‘lifeboat’ for final salary schemes. It currently limits cover to 90% of the first £33,600 per annum of pension income, but this fund is under stress with all the claims.

The bad

  • you are giving up the guarantee that your retirement income will never run out
  • you are often giving up a guaranteed spouse’s or dependants’ pension
  • you may be giving up an inflation-linked or increasing pension
  • if you withdraw too much, you could pay excessive tax

The ugly

  • the markets crash
  • you (or your adviser) manages your investments really poorly
  • you spend too much too quickly (boats, fast cars, holidays)
  • you live much longer than you expect or need long-term care

All of these examples mean you run out of money earlynow that’s really ugly!

What should you do?

You should get qualified and regulated advice from someone who really knows what they’re doing. They need to have a strong pensions background and preferably have been involved extensively with final salary schemes for employers.

How will the story end?

For me, one of the big issues is the role of advisers. Will some of them one day be seen as the outlaws who were responsible for robbing these poor unsuspecting individuals of their right to a stable and predictable retirement?

We’ve seen the regulator move the goalposts before – with the benefit of hindsight. This does worry many firms offering final salary transfer advice. So don’t expect this kind of advice to come cheap; there are simply a hell of a lot of costs and risks associated with providing it.

If I have one message for you, it is make sure you find a tried and tested adviser (not a salesman) who comes highly recommended. Someone who helps you fully understand the implications of any decision and who provides cash flow forecasts. An adviser whose firm has a track record for investing and managing money wisely, at a transparent and fair cost.

Transferring could be a great decision for many people. But for some of you, for goodness sake stay put and whatever you do, watch out for those outlaws!