“Gold Plated Pension”?
Whether it is suitable to transfer a Final Salary (also known as a Defined Benefit or DB scheme) pension into a SIPP or SSAS pension is a subject which is often shied away from. One of the main reasons for this is that these schemes were traditionally seen as “Gold Plated” pensions and were considered by many as a valuable benefit to employees and indeed their families as they seemed to offer a guaranteed income in retirement for the member and a continued, albeit reduced income for their dependants on the death of the member and therefore deemed untouchable.
Research completed by Price Waterhouse Cooper (PWC) last year reported that the combined deficit of the 6000 DB schemes operating in the UK stood at £710 billion which is an alarming amount of underfunding. This, combined with the recent and well publicised BHS debacle have seen both those currently in these types of schemes and ex employees with frozen final salary pensions looking at transfers from these schemes as they are concerned that they may not deliver what was promised or expected at outset.
What does my DB scheme offer?
Typically the main advantage of this type of scheme is the promise of an agreed monthly pension in retirement, the amount of which is usually determined by your final salary and the number of years service you have. There is often a widow/widowers and dependants benefit which means that if a member dies while in receipt of the pension the remaining partner or dependants would continue to receive a pension income of say 50% of the previous monthly payments, which would continue for their lifetime at which point the scheme would cease. As well as a regular monthly income there is an option to receive a tax free lump sum, which will however reduce the monthly pension income.
Each pension scheme will work under it’s own rules. Many schemes as an example do not include overtime, commissions, bonuses or benefits in kind as pensionable salary which could see members receive less than they would expect or would be reliant on. The way in which the tax free lump sum and/or the monthly income is calculated may vary from one scheme to the next. This variation could also apply to the members survivors benefits.
What are the downsides?
There are a number of downsides to those holding final salary pension schemes which have been highlighted for some time now.
The scheme rules generally dictate the retirement age, which at 65 may not fit with an individuals personal requirements or future plans. The tax free lump sum available to final salary pension scheme members may well be lower than those with a defined contribution scheme such as a SIPP or SSAS pension.
When it comes time to draw an income, those in final salary pension schemes are offered little flexibility in how this is done whereas those in a defined contribution scheme have the luxury of a number of different income options. For investors who wish to leave a legacy for loved ones a SIPP or SSAS pension offers this at any point including when a member has gone into drawdown, whereas a final salary scheme member in receipt of benefits, while potentially leaving a reduced income for a loved one, dependant on the agreement at outset, will not have this facility.
What can I transfer to?
Many people, particularly those who wish to invest a pension in property look to SIPP and SSAS pensions as an alternative to their existing schemes as these provide the flexibility and control which they desire and could also offer a legacy which would not be available with the DB schemes mentioned previously.
While a SIPP is open to all, a SSAS pension is designed specifically for company directors, both of which we at The Landlords Pension have extensive experience in dealing with.
Pension holders must be aware that by transferring from a DB scheme they are potentially forfeiting a guaranteed income for life and that advice from a qualified independent financial adviser should be sought prior to completing any transfer.
What does a SSAS or SIPP offer?
Both these types of scheme give an investor the ability to invest in the traditional equity markets, gilts and bonds as well as commercial property, land, property crowdfunding and property bonds. A SSAS pension offers the additional facility for a company director to make a loan to the company of up to 50% of the value of the fund to help grow their business subject to compliance with HMRC rules. When investors are looking at legitimate ways in which to buy property with a pension a SSAS is an excellent idea to facilitate this.
With realistic and increasingly now enhanced transfer values being offered to final salary pension holders, a great number of people are deciding to take control of their own retirement plans rather than relying on past employers to provide this for them.
Summary
If you hold a final salary pension scheme which you are concerned will not deliver what you need or want, if you want to take control of your pension, if you want the flexibility to invest your pension in property and potentially create a legacy for your family then there is an opportunity for you to do so.
If you’d like to find out more about how The Landlords Pension could help you grow your retirement fund complete the for below to arrange to speak with one of our experienced consultants.
