Since the introduction of Pension Freedoms in April 2015, there has been a dramatic increase in the number of people who have left their final salary pension (also known as Defined Benefit) to go into flexible drawdown. For many years final salary pensions have been considered the ‘gold standard’ in pension products, particularly as it would be almost impossible to use the transfer value to buy comparable benefits on the open market.
So why are people transferring away from their employer's pension scheme ?
There are two main reasons. Firstly, Pension Freedoms introduced a whole new approach to how people could use the money they had saved for retirement. Prior to their introduction, no matter what type of pensions you had, there was always a limit on how much you could take out in any one year. While this limit still applies to defined benefit schemes it has gone for those who have money in personal pension arrangements. Equally the death benefits available from flexible drawdown are considered to be significantly better. In certain circumstances it could be possible to pass a significant amount of money on to a loved one completely tax free.
The second reason is that recent low investment returns, low inflation, longer life expectancy and other key variables have all moved in such a way so as to create transfer values that have never been so high. It could be possible for somebody with a pension entitlement of £12,000 per annum to receive more than £500,000 if they chose to transfer.
Naturally such sums of money are attractive to customers, but equally people could overlook the long term benefit of a guaranteed index linked income offered by their final salary pension. For this reason a law was passed that made it compulsory for somebody who had a transfer value of £30,000 or more to be advised by a firm that hold special permissions from the regulator before any transfer could take place. Our firm has those special permissions.
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