Is it wise to swap your final salary pension for cash ?
The new pension freedom rules arrived in April 2015 to a blaze of publicity. Anyone with a ‘money purchase’ scheme, also known as ‘defined contribution can access their money from age 55. It’s good practice to seek free advice when considering to swap your final salary pension for cash.
It was widely accepted that final salary pensions were the ‘gold plated’ pension available as the employers would guarantee a retirement income.
Transferring your final salary pension to a money purchase scheme has now become more attractive as you are allowed to swap your money for cash, and some savers are being offered far better deals than others.
Swap Final Salary Pension Cash
If you have a final salary pension you are allowed to ask for a ‘Cash Equivalent Transfer Value’.
The bigger your employer, potentially the bigger transfer value you will receive.
The key is the new plan achieving the investment return or critical yield needed to match the same benefits as if left in a secure Final Salary environment.
Some schemes are potentially offering a cash lump sum up to 30 times the pension offered. This figure can vary based on the employer. Also to consider is low interest rates have driven up transfer values, but it should be noted this has reduced annuity rates available from money purchase pensions.
Local government pension schemes
Local government pension schemes are among the “funded” public sector schemes that will continue to allow you to transfer your pension for cash.
“Unfunded” public sector pensions, such as the NHS, Firefighters and Army schemes, have stopped allowing people to transfer out.
The transfer value is calculated based on the amount your employer needs to save to pay your benefits from the retirement age.
Considering other factors
Other factors are considered such as whether you have a spouse or partner named on the policy, and your age.
The reason some companies are offering more generous transfer values than others is that some have adjusted their calculations to reflect current low interest rates, whereas others haven’t.
If you was offered a £1 million transfer value as an example, current rules allow you to take 25 per cent tax-free (£250,000) and then have £750,000 left to put into a self-invested pension, where you decide on the investments.
Restrict Pension Withdrawals
If you don’t need the income straight away, and once you’re getting a state pension, you might be happy to restrict pension withdrawals so that your overall income sits below the threshold for 40 per cent tax (currently £43,000). Average assumptions would allow you to take a substantial income* without spending capital, as long as the portfolio is returning an average of 3.5 per cent per annum. In this example, the residual fund can be passed free of inheritance tax at your death. If you’d stayed in the final salary scheme, your family would have inherited nothing.
*Illustrations can be provided on request