Should you cash-in a ‘gold-plated’ pension?

Should you cash-in a ‘gold-plated’ pension?

01/12/2017 14:55
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by Paul Montague, Partner, Blevins Franks
WOULD you prefer £300,000 now, or £10,000 a year, for life?
This is a similar dilemma faced by many Britons with “final-salary” pensions, where employers guarantee a minimum, inflation-linked income throughout retirement.
Today, many pension providers are offering high pay-outs, “transfer values”, to give up those “gold-plated” rights. While there is no correct answer here, it is important to take extreme care. Start by considering six key questions.
What is your pension worth?
A final-salary pension worth £15,000 seems modest, but, with today’s transfer values at up to 40 times the income due, this could represent a pay-out of £500,000+. Properly managed, this could provide a retirement income that well exceeds the original, annual payment.
However, if your combined UK pension benefits (excluding the State Pension) exceed the UK’s £1 million lifetime pension allowance (LTA), charges of either 25% or 55% apply, depending on how you access your funds. With transfer values so high today, these penalties could potentially be triggered when cashing-in a pension valued at £30,000.
Do you have other resources for retirement?
Is your transfer value high enough to outweigh the benefits of drawing an income for life? Or will other pensions, savings and investments provide for your future? If your pension is a large part of your retirement wealth, you are unlikely to benefit from replacing it with a one-off reward.
How long do you need it to last?
Final-salary pensions provide income for as long as you live; that could be 30 years or more after retiring. Only consider cashing-in your pension if you do not expect to outlive your resources; those in good health may prefer the certainty of a lifetime income.
How stable is your pension scheme?
The cost of financing pension benefits has soared, as assets underpinning them – mostly UK bonds – have underperformed amidst ultra-low interest rates. Many providers are vulnerable, facing significant shortfalls in funding payments. Higher-than-usual transfer values can offload future pension liabilities, and avoid a BHS-style collapse, where thousands of ex-employees had their pension benefits diluted.
While the government’s Pension Protection Fund offers a safety net, it currently only compensates up to £34,655 a year at age 65. Where pension benefits are worth more and the scheme is vulnerable, consider transferring.
What will happen when you die?
Most final-salary pensions only pass half the value to your spouse on death, then go no further. Transferring your funds can unlock more estate planning flexibility, including the option to pass on pension funds to other heirs, even across generations.
What is your appetite for risk?
Final-salary pension benefits are protected; even if the value decreases, providers must meet guaranteed payments. Once transferred, you gain more control over how to invest and access funds, but they become vulnerable to unpredictable markets; even bank deposits can diminish through inflation. And, without proper guidance, you risk losing everything to unregulated investments or pension scams.
Whether you should transfer a final-salary pension depends on numerous factors, and your unique set of circumstances and goals. While taking regulated advice is compulsory for benefits worth £30,000+, it is an important step for anyone considering their pension options.
Remember, if you cash-in your pension, you cannot reverse your decision. Look beyond the temptation of large, pension pay-outs, and take specialist advice to fully understand the long-term implications, to do what is best for your financial future.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices, which are subject to change. Tax information has been summarised; individuals are advised to seek personalised advice.
Keep up to date on the financial issues that may affect you on the Blevins Franks news page at www.blevinsfranks.com
 

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