Why reviewing your final salary pension scheme is so important

Sep 5, 2018 | Tony Byrne's View

 

Do you have a final salary pension scheme from a previous employer or one that has been closed by your current employer? Are you aged 50 plus? If the answer to the first two questions is “yes”, have you ever had your pension professionally reviewed? If the answer is “no” then the rest of this blog is very relevant to you.

Final salary pension schemes used to be untouchable. Many such schemes could only have been described as gold-plated, very safe and secure, paying guaranteed pensions for life including widows’ pensions. However all of that has changed in recent years for a number of reasons.

Firstly, George Osbourne, the Tory Chancellor of the Exchequer in 2015, introduced some sweeping changes to personal pensions known as pension freedoms. Under these reforms individuals for the first time were allowed to withdraw as much money as they liked from their personal pensions. Personal pensions became totally free of Inheritance Tax. If the personal pension holder died before age 75 their beneficiaries could make tax free withdrawals from their inherited pension for life. If the death was post age 75 then their beneficiaries would have to pay Income Tax on the withdrawals at their top rate of tax. Personal pensions became fully inheritable by not only spouses but also children and grandchildren etc.

Secondly, final salary pension schemes have increasingly become weakened due to poor investment returns, bad management and increasingly stringent pensions legislation.

Thirdly, life expectancy has continued to grow. We already have some clients who have been retired for as many years as their actual years of work!

Final salary pension schemes were designed for an era in which people worked for a single employer for life, retired at age 65 and then died at age 68. Such pensions are under increasing financial pressure. Many such schemes are in deficit which means that they have insufficient assets to pay their liabilities in other words the pensions they have promised. Already a third of final salary pension schemes have been taken over by the lifeboat scheme The Pension Protection Fund (PPF). The average person whose pension gets rescued in this way loses approximately 20% of their benefits!

The word deficit is used but the reality is that these schemes are insolvent. Combined pension scheme deficits in the UK have been rising annually for many years. Many schemes have a plan to repay their deficits over a number of years. Whether they will succeed remains to be seen. In the meantime we have seen some spectacular company failures such as BHS together with huge pension scheme deficits which in BHS’s case was £700m. Sir Philip Green’s payment of £363m into the scheme halved the deficit which allowed it to go into the PPF. Before that payment it was by no means certain that the PPF would rescue the scheme.

We have been advising clients to get their final salary pension schemes reviewed since 2015. Many clients have had their pensions reviewed and the majority of them have transferred their final salary pension schemes into personal pensions.

The reasons given by clients to transfer their final salary pensions into personal pensions are numerous. These are some examples:

  1. The tax free cash amount is often higher under a personal pension;
  2. Death benefits are usually significantly higher for a personal pension;
  3. The transfer value offered is often very generous especially from banks and insurance companies;
  4. A personal pension is inheritable whereas a final salary pension scheme dies with you and your spouse;
  5. In a final salary pension scheme when the member dies the spouse’s pension is halved. Under Income Drawdown when the member dies the survivor’s pension remains unchanged meaning it is effectively equivalent to a 100% widow’s annuity;
  6. The investment return in a personal pension to match the final salary pension given up is usually relatively low at about 3%-5% p.a. on average.

So if you have a preserved final salary pension scheme and you haven’t yet had it reviewed what are you waiting for. Contact us for a final salary pension scheme review. You know it makes sense.

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