Should you transfer a final salary pension? Six questions to help you decide
If you were offered £235,000 now or an inflation-proofed £10,000 a year for the rest of your life, what would you choose?
This is a similar dilemma faced by many Britons with ‘final salary’ or ‘defined benefit’ employer pensions, as those figures represent today’s average pay-out for members who forfeit their pension benefits for a one-off sum.
While there is no right or wrong approach, it is essential to take extreme care before making major pension decisions. Start by considering six key questions.
- What is your pension worth?
The £10,000-a-year example sounds low but could well be enough to provide for a modest retirement. However, a one-off sum of £235,000+ could also provide an adequate retirement income if properly managed over time, with potentially more flexibility around withdrawals and currency options.
- Do you have other resources for retirement?
The UK State Pension currently pays a maximum of around £8,700 a year, so most people need something extra to see them through. Is your pension transfer value high enough to outweigh the benefits of drawing a guaranteed income for life? If your final salary pension is a large part of your retirement wealth, the certainty of a regular lifetime income will hold more value.
- How long do you need it to last?
Final salary pensions provide income for as long as you live – with today’s life expectancy, that could be 30+ years from retirement. Those in good health may benefit more from a guaranteed lifetime income; the opposite may be true for those who do not expect to outlive their resources.
- How stable is your pension scheme?
Many final salary employers are struggling to meet their obligations. Benefits are usually financed through investments in UK bonds, which have generally under-performed through years of low interest rates.
While the government’s Pension Protection Fund (PPF) offers a safety net for members of failing schemes, it currently only compensates up to £40,020 a year at age 65. If your pension is high value and your scheme is vulnerable, take advice on whether transferring may be in your best interests.
- What will happen when you die?
Most final salary pensions will transfer half the value of the pension to your spouse on death – then go no further. Transferring funds could unlock more estate planning flexibility, such as the option to pass pension funds to other heirs, and potentially even reduce inheritance tax liability.
- What do you want to do with your funds?
Benefits in a final salary pension are protected – even if the value of funds goes down, the scheme provider is obliged to make payments.
Once transferred, you gain more control over how you invest and access your funds, but your money is no longer safeguarded and becomes vulnerable to unpredictable markets. While investments can obviously go up as well as down, without proper guidance you risk losing everything to unregulated investments or pension scams.
Ultimately, whether you should transfer a final salary pension depends on numerous factors and your unique set of circumstances and goals. Take locally-based, UK-regulated advice to fully understand the long-term implications and establish what is best for your financial future in Spain.
Summarised tax information is based upon our understanding of current laws and practices which may change. Individuals should seek personalised advice.