Pension Possibilities

 

Leave or remain – The Final Salary pension decision

 

With pension transfer values close to record highs it can be very tempting to consider switching from a Final Salary Pension (also called a Defined Benefit pension scheme), into a Self Invested Personal Pension (SIPP). For example, we have seen Final Salary pension forecasts which are forecast to pay under £24,000 per year, but which have a pension transfer value of over £850,000. 

For many people a Final Salary scheme will be their best option for their retirement, but for some a SIPP will offer a number of particular advantages that suit their needs.

In order to make this decision you should be aware of all the advantages and disadvantages of doing so and the specific factors which might make it particularly attractive or unattractive in your individual case. Since your pension may well be your largest lifetime investment and your decision will undoubtedly affect your standard of living throughout your life, we consider it essential you take professional financial advice.

 

Finding out about your pension transfer value

You can find out how much your pension is worth by contacting your pension administrator who can provide you with a number of pension income options and a transfer value. Last year we met with a pension scheme member with a final salary of £35,000, 37 years’ company service and a quoted transfer value of £852,000. Whilst transfer values are rarely as high as this, the case illustrates the factors which determine the potential of a pension transfer value.

 

The advantages and disadvantages of transferring

Whilst the receipt of a considerable pension transfer value, the majority of which will need to be reinvested, may appear very tempting you must consider the fact that you would be giving up a guaranteed pension for live and that your new pension provision will be subject to investment risk. This could mean running out of money in retirement if investment returns are poor or if you withdraw too much of it each year.

 

Retaining the Final Salary Pension:

 

Advantages

Disadvantages

 

  • A guaranteed income for life
  • No risk of your income reducing or running out
  • No ongoing costs
  • No need for ongoing pension withdrawals

 

 

 

 

 

  • Your income is fixed for life and will only increase according to the terms of your pension (for example the Consumer Price Index or Retail Price Index)
  • Tax free cash must be taken all at once
  • Pension Income will normally fall on your death leaving your spouse or civil partner a lower income
  • Pension income ceases on your death if you are not married or you have not entered into a civil partnership
  • There will be no inheritance to leave to chosen ones

 

Moving into a SIPP:

 

Advantages

Disadvantages

  • Some flexibility to adjust your income receipts each year*
  • Flexibility to spread timing of taking tax-free cash
  • The ability to cease taking income payments if you wish
  • The ability to invest to grow your pension pot and to leave it as an inheritance to those you choose
  • No automatic reduction in income payable to your spouse or partner on your death
  •  Your pension pot is subject to investment risk and can fall in value
  • If you withdraw too much in the early years or when investment markets are performing poorly then you may run out of money
  • There will be ongoing pension administration, investment and adviser costs

 

*Currently Isle of Man SIPPs are restricted to a maximum income drawing per year. The Isle of Man Government has been consulting on pension freedoms, since in the UK SIPP holders have unrestricted access to their pension holdings.

 

Personal considerations:

Without looking very carefully at your own personal circumstances, there is rarely an obvious choice. Factors that you might like to consider are:

 

  • The transfer value versus the income projection
  • Your family circumstances – do you have people you wish to leave money to?
  • Whether or not you have a spouse, civil partner or partner you are not married too
  • Your health and life expectancy
  • Your need for flexibility in drawing income
  • The size of your pension pot in relation to other assets you hold, the absolute value and asset composition of those other assets – i.e. your dependency on your pension and your tolerance to falls in its value
  • Your attitude to risk and to engaging on an ongoing basis with a financial adviser
  • The financial strength of the company backing your pension scheme

 

Making a decision:

From the above, you can see that there are many factors to take into account, and very careful consideration should be given before any decision is made. Since your pension may well be the most valuable asset you hold, built from many years of hard work and saving and which cannot be accumulated again, it is essential you take professional financial advice before making any decision.

 

To explore these pension options further and how they might meet your retirement objectives, call Gerald Chase or Mark Gilmartin on 640350 or email mark@chasewealth.im for a no-obligation meeting. Gerald and Mark are both experienced pension advisers who have advised on both UK and Isle of Man pensions.