Skip to main content

To transfer or not to transfer?

More than 100,000 people transferred out of Defined Benefit (DB) pensions in 2017/18[1]. A DB pension scheme is one where the amount you’re paid is based on how many years you’ve worked for your employer and the salary you’ve earned. The figures show that a large number of people are still transferring out of traditional salary-related pensions, but whether this is a good idea or not depends crucially on your individual circumstances.

For many people, a guaranteed salary-related pension that lasts as long as you do and is unaffected by the ups and downs of markets, is likely to be the best answer. But there will be some who want extra flexibility or are focused on passing on some of their pension wealth for whom a transfer might be the right answer. It is vital to take, and listen to, professional financial advice in the form of pension transfer specialists before making a big decision of this sort.

Five reasons why a pension transfer might be suitable


  1. Flexibility – instead of taking a set pension on a set date, you have much more choice about how and when you take your pension. Many people are choosing to ‘front load’ their pensions, so that they have more money when they are more fit and able to travel, or to act as a bridge until their State Pension or other pension becomes payable.
  2. Tax-free cash – some DB pension schemes may offer a poor deal if you want to convert part of your DB pension into a tax-free lump sum. Although the tax-free cash is in theory 25% of the value of the pension, you often lose more than 25% of your annual pension if you go for tax-free cash; in a Defined Contribution (DC) pension, you get exactly 25% of the pot as tax-free cash.
  3. Inheritance – generous tax rules mean that if you leave behind money in a DC pension pot, it can be passed onwith a favourable tax treatment, especially if you die before the age of 75. In a DB pension, while there may be a regular pension for a widow or widower, there is unlikely to be a lump sum inheritance to children.
  4. Health – those who live the longest get the most out of a DB pension, but those who expect to have a shorter life expectancy might do better to transfer if this means there is a balance left in their pension fund when they die, which can be passed on. Please note that HM Revenue & Customs may challenge this for those who die within two years of a transfer.
  5. Employer solvency – while most pensions will be paid in full, every year some sponsoring employers go bankrupt. If the DB pension scheme goes into the Pension Protection Fund (PPF), you could lose 10% if you are under pension age and may get lower annual increases; if you have transferred out, you are not affected.

Five reasons why a pension transfer might not be suitable


  1. Certainty – with a DB pension, you get a regular payment that lasts as long as you do; with a DC pot, you have to face ‘longevity risk’ (not knowing how long you will live).
  2. Inflation – a DB pension has a measure of built-in protection against inflation, but with a DC pot you have to manage this risk yourself, which can be expensive.
  3. Investment risk – with a DC pension, you have to handle the ups and downs of the stock market and other investments; with a DB scheme, you don’t need to worry – it’s the scheme’s problem.
  4. Provision for survivors – by law, DB pensions have to offer minimum level of pensions for widows/widowers etc, whereas if you use a DC pension pot to buy an annuity, it dies with you unless you pay extra for a ‘joint life’ policy.
  5. Tax – DB pensions are treated relatively favourably from the point of view of pension tax relief. Those with larger pensions could be under the lifetime limit (currently £1.03 milion) inside a DB scheme, but the same benefit could be above the limit if transferred into a DC arrangement.


Comments

Popular posts from this blog

Ben Allen achieves the Later Life Adviser Accreditation with SOLLA

SOLLA was established in 2008 as a not for profit organisation dedicated to higher standards and accessibility to regulated financial advice for older people and their families. There are no shareholders and any profit is used to sustain the Society and its objectives.

All SOLLA later life advisers specialise in the financial needs of older people. Professional qualifications, whilst essential, do not always give a full picture of an adviser's experience or expertise. Those advisers who have taken the further step to become independently accredited can offer the added reassurance that they can give the practical help and guidance needed to help you make the right decisions at the right time. All full members of the Society must achieve the Later Life Adviser Accreditation and adhere to a Code of Practice to ensure their clients know what to expect from their services.

SOLLA helps people and their families in finding trusted accredited financial advisers who understand financial ne…

Parents attempting 24hour 3 Peaks Challenge

Parents Ben and Rebecca Allen (Allen Tomas & Co employees) are part of a group of intrepid West Norfolk parents that are training hard for the 3 Peaks Challenge to raise vital funds for their local school (Ingoldisthorpe Church of England Voluntary Aided Primary School). They will summit the highest mountains in England, Scotland and Wales in 24 hours from dusk on 31st August, walking over 37kms, climbing a total of over 10,000ft and driving 1830kms.

The completion of the challenge will help secure two exciting new developments for Ingoldisthorpe Primary: an outdoor log cabin classroom which will provide much needed space at their children's school and a stage piano to strengthen the school's music provision. A log cabin to match the existing classrooms will cost around £8,000 to buy and site on the school field. It will offer the school space for Music Lessons which are an important part of the curriculum, along with room for art, reading and intervention sessions for sm…

The Dividend Allowance

Is this dividend allowance cut still going ahead? Although this dividend allowance cut was dropped from the Finance Bill 2017 as a result of the General Election, it will go ahead as planned from April 2018, as it was re-introduced into a second Finance Bill (published on 8th September). The Bill received Royal Assent on 16th November 2017.

What is the dividend allowance? The dividend allowance was only implemented in April 2016, as part of a radical shake-up in the way dividends are taxed. Prior to this date, under the tax credit system, dividends were paid to shareholders net, and multiplied by 10/9 to produce the gross dividend upon which dividend tax was levied.

Since the new rules came into play in April 2016, dividends are subject to new tax rates (basic – 7.5%, higher – 32.5% and additional – 38.1%). This has placed a significant additional tax burden on limited company owners. The one concession was the creation of a tax-free ‘dividend allowance’ applied to the first £5,000 o…