Personal pension pitfalls.
There became an unwritten rule that final salary to personal pension transfers were off-limits except in the most exceptional circumstances. All this has been turned on its head by the new pension rules announced last year by George Osborne and due to come into force in April 2015.
Basically, these have made personal pension.s a lot more attractive for some final salary scheme members, especially for those where investment risk is less of an issue.
The reason final salary schemes are so desirable is that they pay a known pension amount based on the members' years of service and leaving salary. They usually also offer a tax-free lump sum and a spouse's pension on the death of the member.
Under the new rules, personal pensions have a number of advantages. You can take any amount of your pension "pot" at any time, with 25 per cent tax-free and 75 per cent tax. ed at your marginal rate of income tax. This allows the individual to plan how best and when to take cash out.
This could help with tax planning, or if you have particular need for a lump sum, say to pay off the mortgage. When a member takes a lump sum from a final salary scheme it is often restricted and poor value when compared to a personal pension.
There are a number of specific scenarios where a final salary member may benefit from transferring to a personal pension. Even if the member is single, there is a provision for a spouse's pension built into the final salary terms.
This benefit can't be paid as a lump sum or to anyone other than the member's spouse or civil partner. There is no ability to pass this on to a partner or children on the member's death. Benefits from a personal pension. can be passed on to any nominated beneficiary either as income or a lump sum.
If a final salary scheme member approaching retirement is suffering serious ill health, it may be advantageous to transfer out. There is no ability to vary benefits from the final salary scheme. Under a personal pension., the member can draw lump sums out to ensure they get full value, or they may be entitled to an enhanced annuity.
The new rules make a personal pension. a much more attractive environment as far as estate planning is concerned. If the member dies before his or her 75th birthday, the remaining pension pot can be passed on to the beneficiary free of tax.
The final salary scheme is obliged to provide a transfer value to the member on request. This is the starting point in assessing whether the transfer is advisable.
Some schemes have offered enhanced transfer values to induce members to leave. In other cases, the current extremely low Gilt yields mean that transfer values are considerably higher than they have been historically.
There are many considerations to take into account when considering a transfer out of a final salary scheme, all of them a potential pitfall. It will only be appropriate for a very small number of people and it is vital they are fully aware of the full implications of the change.
Trevor Law is a director with Merito Financial Services, chartered financial planners, based in Solihull. E-mail: firstname.lastname@example.org