A pension transfer may not be suited for everyone. Some people may choose to avoid while others may consider it the right step to help them attain their lifestyle and financial goals. According to the pension’s regulator, it’s estimated that about £14.3 million was transferred out of salary schemes between 2017 and 2018.
Is Pension Transfer the Right Move?
If you choose to move your final salary pension you’re going from a guaranteed investment that’s protected from inflation to one that’s at risk of standard investment. A lot of factors can affect whether it’s ideal to transfer your final salary pension.
Here are a few things that you should know.
Enjoy a Tax-Free Lump Sum
Pension holders above the age of 55 can get access to a tax-free cash lump of 25% without having to draw the remaining pension. Take note that while you can get your final salary pension in cash when you retire, the calculation designed to determine your lump sum is based on a scheme’s rules and regulations.
It is possible that you may end up receiving 25% less than what is invested in your pension. In some schemes, the lump sum is offered at a cost of receiving lower starting pension. This means that if you withdraw a bigger lump sum chances are that you are sacrificing your future pension.
Pension Protection Fund
If an employer becomes insolvent and finds it impossible to pay money into the scheme, the pension fund may become insufficient to meet its liability. In such a case, the scheme assets will pass into the pension protected fund, and your income gets paid from that point.
For those who’ve passed the scheme retirement age, the pension continues at the same value.
Never Run Out of Money
A pension scheme has to manage its assets to make payments to you as long as your dependents survive. Regardless of the income you start with it will increase gradually with inflation, but there are always limitations to how much protection you’ll receive.
More Control over Tax Income Planning
With the final salary pension transfer claim, the level of pension income and the lump sum payment may be decided by the pension scheme administrator. This is however decided by your final salary and length of service. The good thing about a personal pension is that the owners get to enjoy whatever level of income they feel appropriate during their retirement.
They may even choose to decrease, increase or even stop pension income if they feel it appropriate during their retirement. With the possibility to pass wealth with a personal pension without having to incur inheritance tax, they may choose to leave cash in their pension than properties or cash.
With this level of control and flexibility personal pension holders not only have control over their tax rate but they can effectively manage their tax liability. If you’re managing different sources of income, such flexibility is useful.
Low Investment Risks
The good thing about your final salary pension transfer claim is that you never have to worry about falling investment markets. A trustee is responsible for managing the assets to meet the needs of the employer and for the members.
Before-tax reforms came into effect, the ability to pass wealth efficiently through a pension fund was limited. Today, owners of a personal pension get to nominate anyone to receive the amount when they die. The “death benefit” is paid in a lump sum and the beneficiary is free from inheritance tax (that’s if you die by the age of 75).
With such a favourable tax treatment you can efficiently draw retirement income from alternative sources, leaving the full amount of your pension to your loved one.