Throughout your working life, you will probably have several jobs – which means you could accumulate multiple pensions from different companies. Managing these can be time-consuming, and the numerous fees and charges can add up. Additionally, with a pension deficit in excess of £5 trillion in the UK alone, millions of people are taking their pensions overseas with them, transferring them into one pot to make life easier.
While this might not be the best strategy for everyone, here are some of the reasons why you might consider it for yourself.
Final salary or ‘defined benefit’ pensions generally pay a guaranteed income for life. However, they’re not as flexible as the alternative ‘defined contribution’ plans. Transferring from a final salary to a defined contribution plan means giving up a regular guaranteed income for a much larger lump sum, often being offered at multiples of 30 to 40 times the projected annual pension income.
Schemes value their pension vows based on the yields paid on government bonds or gilts. When these yields fall, pension liabilities rise. As the economic landscape changes, yields may increase, reducing liabilities and therefore the amount of money that needs to be put aside now to pay future pensions. Which may make schemes reduce the amount they offer to people who want to transfer.
With pension transfer values at almost record highs, many argue this might be a good time to make a move. The Pensions Institute in the UK also warns that over a thousand defined benefit schemes are at serious risk of failing, giving expats reason to look for alternatives.
Behavioural economics also teaches us that cash now is better than cash tomorrow. The possibility of using that lump sum amount to pay off a mortgage, set up a children’s education fund, and/or invest in equity to generate dividend makes it easy to see why so many expats find this to be a lucrative strategy for retirement planning.
Another limiting factor with defined benefit pensions is that income is typically not paid after the death of the member’s spouse. Investing the lump sum generated from a pension transfer in alternative funds can help setup an income stream from investments that can serve your future generations free of inheritance tax.
Combining pension pots also makes things straightforward, allowing you to keep track of how much you’ve saved in one place, without any hassle. The flexibility of this arrangement is often considered more favourable than the secure income a final salary scheme provides.
Having said that, there are a few words of caution worth considering.
First, if the transfer value of the pension is above £30,000, laws in the UK require you to seek guidance from a financial advisor first for impartial, expert advice to evaluate if that’s the best option for you. The cost of this advice is usually a percentage of the amount being transferred, which you should factor in your cost benefit analysis.
Secondly, final salary pensions are linked to inflation. All management fees are also met by the scheme, which might deter people from cashing in their defined benefit schemes. Also, currently in most cases the entire pension must be transferred, preventing you from slicing and dicing your pension scheme to suit your retirement needs.
Lastly, if an adviser recommends against a transfer, it can be very difficult to find a provider that will accept it.
If you’re contemplating transferring your pensions abroad, speak to one of our independent financial advisors to evaluate if it’s a good option for you by requesting a call back.