Should I transfer my Final Salary Pension – Yes or No?
In recent years, I have been asked this question quite often. When I come to answer it, you might think that I sound like a politician being interviewed by Jeremy Paxman – anything but a straight answer! However, being brutally honest, your circumstances are unique so a straight 'Yes' or 'No' is an unqualified flip of a coin. Giving up a very valuable guaranteed income for a seemingly generous cash lump sum is a big step, so my qualified position always starts from a “No” unless together, we can prove saying 'Yes' is more beneficial to you now and for the long term.
What is a final salary pension? It is one which pays a retirement income based on a percentage of your final salary and length of service either at retirement, or at the date of leaving the company or the scheme closing (which is a common situation today). These pensions tend to offer inflation protection so you don't lose out if you decide not to take your pension straightaway.
You will have many reasons for considering your long term retirement strategy. For instance: The Chancellor's introduction of ‘Pension Freedom' in March 2014; very low interest rates increasing the transfer values; employers moving away from Final Salary schemes and understandable concern about high profile pension schemes been in deficit like BHS and Tata Steel reported earlier this year.
It is very easy to accept a seemingly high cash transfer value offer. They have primarily risen due to falling interest rates and lower returns on government bonds, and when interest rates fall in this way, it becomes more expensive for companies to pay pensioners their incomes. BUT is it right for you?
Your situation is unique, so you need advice based on your circumstances. It is vital to conduct a variety of stress tests. Look at various “what if” scenarios. Include all your other long term savings and assets, establish your best choices for the future. Why? Because if you take the cash option, you cannot put the ‘genie back in the bottle' - it cannot be reversed, so you need to know the facts unique to your situation, this could involve seemingly unconnected issues such as your state of health, family and life aspirations.
When taking expert independent financial advice, it may be wise to consider a 2 stage process. Pay a fee for an Independent Financial Advisor (IFA) to look at your plans, do the research, conduct stress testing and consider the 'what ifs’- if the advice is ‘No, don’t take the cash transfer offer’ – you know you are only paying a fee for the qualified advice given considering your unique circumstances. If the answer is ‘Yes’ then the 2nd stage will incur an implementation fee.
Not all financial advisers can offer this type of advice. We are required to hold specialist qualifications, so do check when considering consulting an IFA - Only deal with companies authorised by the FCA. You can check authorised companies by calling 0800 111 6768.
It's one of the most important decisions you'll make. It can take some time to collect the information needed to ensure the advice offered is appropriate to your situation. Your decision is something not to be rushed – it is your money – it is your future. Get the qualified advice you need to make an educated decision.