Final Salary Pensions – Article Two

Are they right for everyone?

Last month I explained that Final Salary Pensions are often considered to be the pension we would all want to have – the type of pension you would not ‘usually’ transfer out of. Available to employees of many larger companies in the UK, as well as those in the public sector, these pensions often provide excellent benefits and if you have one from a former employment you would be forgiven for thinking that under no circumstances would you want to give it up. Often this is correct – but not always!

Previously I gave an example of someone who had a final salary scheme that provided a spouses pension, but he was single, and gave no return to his children on his death after retirement as they were not dependent. By thinking he was in the ‘Rolls Royce’ of pension schemes, he was unaware that an alternative pension arrangement could have provided his children in excess of £300,000 on his death. Instead they received nothing.

Here is another example to consider:

Sarah is married to Nick. They met when they both worked for ‘Smith Industrial plc.’ in Bristol. She left to start a family, returning to work with Bristol City Council, when the children started secondary school. After 15 years’ service she decided to set herself up in business. Sarah is 56 and Nick 59. Nick wants to retire at 60 and Sarah’s work is seasonal. They have bought a campervan and want to spend several months a year exploring Europe. They have paid off their mortgage and have a relatively small amount of money in ISA’s as an emergency fund. They want to enjoy the next 5 years or so while still young enough to do so.

Next year they will have a good income from Nick’s pension as he never left Smith’s, plus Sarah’s business will provide an income of about £6,500. However they need another £4,000 annual income to cover increased living expenses whilst away and possibly access to capital. Sarah has her two final salary pensions; the larger local authority one and the smaller ‘Smith Industrial’ one with limited death benefits, but neither are due to commence until she is 60. One solution might be to transfer her ‘Smith Industrial’ final salary scheme to a private pension plan she already has, valued at £20,000. She is amazed that the transfer value which was £39,000 4 years ago, has now increased to £68,000. She is happy about transferring this and withdrawing an income, as she still has a guaranteed increasing income available from her local authority scheme when she is 60. Nick has his pension and both of them have the state pension to come in due course. By transferring Sarah’s smaller ‘Smith Industrial’ pension to her personal pension, she can draw down the required £4,000 annual income from it as she is 55. The income from the pension when added to her self- employed earnings means she remains below her personal allowance – so she’ll pay no income tax. She can also use the £22,000 tax free cash from the private pension, if they need capital. So although ‘cashing in’ a final salary scheme and giving up the index-linked income she would have received from 60, she is now able to 1) gain earlier access to her pension to use for the European trip, 2) have superior death benefits as Nick feels a lump sum of about £88,000 is more useful to him than a small pension that he does not need in any case and 3) control whether her income is liable to income tax or not.

It is extremely important to state that the above does not constitute advice and because everyone’s circumstances are different, we strongly suggest you seek independent financial advice.

Author: Phil James, Grosvenor Consultancy Ltd

There are advantages and disadvantages to using all of these strategies and they depend on individual circumstances so don’t take action without seeking competent advice. Tax rules, rates and allowances are all subject to change. The Financial Conduct Authority does not regulate tax advice and some forms of offshore investments. The value of investments and the income from them can fall as well as rise and you may not get back the full amount you invested.

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