Richard Johnston – Financial Planning Director
Recently, there has been a surge in individuals transferring their entitlement within defined benefit (DB) pension schemes (e.g. a final salary pension scheme) to a defined contribution (DC) arrangement (e.g. a personal pension) – and with good reason.
Why the Sudden Interest?
The ability to transfer the entitlement has always existed, but the sums offered have increased significantly since the Brexit referendum of June 2016 as a result of changing economic factors which influence the calculation performed by the DB schemes’ actuaries. (Specifically, the reduced Gilt yield and increased inflation rate are largely responsible).
As DC arrangements have become much more flexible in recent years, this has also increased the demand for such plans. Many people view the transfer as an opportunity to enhance the potential inheritance for their children, given that the income from a DB scheme often ceases upon death (unless there is a surviving spouse), whereas a DC pot can be inherited – potentially with little or no tax being payable.
Who Can Transfer?
Essentially, any person with benefits within a ‘funded’ DB scheme can transfer (so excluding schemes such as those applying to the NHS and Civil Service), but normally only deferred members (i.e. those no longer actively accruing entitlement) are likely to pursue it, given that it would otherwise be necessary to opt-out of the scheme.
From a practical perspective, however, there is a legislative requirement to obtain independent financial advice if the value involved is over £30,000 and so those with transfer sums below, say, £150,000, may find it unviable to pursue the matter.
For a person in their late 50s, current transfer values are typically 25-30 times the annual deferred pension income and so this can be used as a means of estimating.
How to Proceed
Firstly, it is important to obtain a guaranteed transfer value quotation from the scheme which, once presented, is guaranteed for three months. The main concern with doing this is that most schemes only permit members to obtain one valuation each year – but otherwise there is no cost to requesting it.
The next step is to approach an appropriate and qualified financial adviser so that they may assess the valuation, discuss the pros and cons, and advise accordingly.
Murray Asset Management provides this service, so please get in touch if it interests you.