As you approach the end of your working life, it can be tempting to pursue alternative avenues of investment to see if you can maximise your retirement pot. There are many legitimate ways that you can do this, one of the most common being SIPPs (self-invested personal pensions).
However, transferring your final salary pension into something less protected is always going to be high-risk. The returns may be greater, but we all benefit from the guaranteed security of occupational pension schemes. The money is protected by the government and, generally speaking, you get out what you put in. And yet, for those willing to accept more than a little risk, alternative schemes can be very rewarding.
In this article, we’re going to give you both sides of the argument so that you can decide for yourself. At least then it will be an informed and measured decision rather than one based solely on the promised returns. Take a look!
But first, what is a ‘final salary pension?’
Classed as a defined benefit pension, a final salary pension is the funding you receive at the beginning of retirement onward. Recipients get a guaranteed income for the rest of their lives, and it’s indexed for inflation so it’s responsive to the changes in financial markets.
The income differs from person to person and is based on a few factors. Essentially, the amount received depends on the number of years worked with the final employer and how many years were spent contributing to the scheme. Salary when retiring is also taken into consideration. Pension savers can access their pension money once they reach retirement age, or can choose to access it early at 55 (this depends on whether or not the company permits it).
So, why should you transfer your final salary pension into a SIPP?
As SIPPs give you the control and flexibility to manage your retirement money on your own, it often works out well for lots of people who, after making peace with the considerable element of risk, decide to transfer their salary pension into a SIPP.
There are plenty of benefits, so we’ll go through those first before laying out the risks.
Benefits of transferring your final salary pension
Aside from the flexibility of SIPPs, there are some benefits of transferring your final salary pension. While the guaranteed benefits of final pensions give you security, transferring it opens up new opportunities (should you accept the risks, which we will come to shortly).
- Once you transfer a final salary pension, you’re not tied to the minimum age requirements of a normal salary pension. This means that you may be able to access your pension at an earlier age.
- Any unspent pension may be inherited by your selected beneficiaries and, unlike your final salary pension, it will be free from inheritance tax.
- You will build your income if the stock market performs well. Unlike your final salary pension, your savings would be responsive to the stock market.
- Final salary pensions are not protected if your former employer becomes insolvent. When you transfer your final salary pension, this of course does not apply.
Risks of transferring your final salary pension
There are highly considerable risks in transferring your final salary pension, whether it’s into a SIPP or not. Although you can receive high returns, your income can potentially drop further than you’d have in your salary pension.
- Your savings may be responsive to stock market rises, but they’re also responsive to falls. This has the potential to hit your finances hard and undo years of hard work spent contributing to your salary pension.
- There are fees incurred when you take financial advice pre-transfer. Coupled with the potential financial losses in the future, transferring is an expensive endeavour.
- Once you’ve transferred, the responsibility of managing your pension falls on you. Each time you receive expert financial advice, of which you will likely need on at least a semi-regular basis, you will be charged a fee.
- You will lose the guaranteed income of a final salary pension. If you’re uncomfortable with risk, we strongly advise you not to transfer.
Final salary transfer pension advice from the experts
Seeking financial advice that you can trust can be a minefield. Our team is well-placed to help with any number of pension claims matters, and if in the instance that you’ve taken on bad pension investment advice, we can help you with a simple pension transfer claim.
Fill in our onsite form (it takes 30 seconds to complete and can be found anywhere on the website), or call 0161 968 0768 to speak to us directly. We’ve helped countless people across the country, so let us help you.
In the meantime, visit our blog. It’s packed with helpful tips and insights regarding pensions, financial advice and more. Here are just a few articles that you might find useful.