Hills Financial Planning

If you are lucky enough to have a private sector final salary pension scheme then you may have noticed recently that many of your colleagues are transferring their benefits to a personal pension plan.  This is a hugely complex area and fraught with difficulties, but for some people, transferring out of their company pension scheme will be the right thing to do.  In recent months we have seen people who work for companies such  JTI, Michelin, First Trust and British Gas transfer their benefits to a private pension in their own name. The dilemma is, is it better to have a guaranteed pension of say £20,000 per annum or a pension pot of £750,000 that can be spent whenever it is required?  For some people, the answer will depend on how long they are going to live.  Single people will usually find that the company pension ceases when they die, whereas a private pension pot can in many cased be passed in its entirety tax free on death to family. Those who are married will probably have a 50% spouses pension that is payable on their death but this is very unlikely to be better than the entire fund being paid out free of tax.  For some people, transferring is attractive, as it often means that more tax free cash can be taken from the fund.  For others, the main reason to transfer is that a private pension pot can be flexibly accessed by taking greater withdrawals in early retirement, when spending is highest and lower withdrawals in late retirement, when spending is more modest. So, why shouldn’t everyone transfer out of their final salary scheme?  Well, the main reasons are to do with the extra risks that this involves.  A personal pension has extra investment risk and this can be compounded by taking withdrawals at a time when the markets are down.  A personal pension can also suffer from inflation risk if prices are rising faster than the income taken from the pension.  Longevity risk may also be a problem.  This is where you live longer than expected and the private pension pot runs out before you die.  For some, the benefits of transferring out will outweigh the risks and transfer values are currently at an all time high resulting is a surge of employees transferring out of their old final salary pensions.

David Hill is a Chartered Financial Planner and pension transfer specialist at Hills Financial Planning, 15 Agnew Street, Larne.  He can be contacted on 028 28276814, email david@hillsfinancialplanning.co.uk or see www.hillsfinancialplanning.co.uk