Many of you will have existing pensions from your time working in the U.K. (or elsewhere), and it amazes me how many pensions have been forgotten, lost, or just simply left unattended for years. Pension planning is a core part of a ﬁnancial plan, and with that in mind, let’s outline some basic considerations for you here.
Defined Benefit (DB) Pension Plans.
A final salary or DB pension is one where the amount of pension you’re paid is based on how many years you’ve worked for your employer and the salary you’ve earned. They then pay you a guaranteed, inflation-proof income for life. Your income is not subject to investment performance of your individual pension, as your previous employer pays the pension and you do not have to make contributions.
Defined Contribution (DC) Pension Plans.
A DC pension has an investment value that fluctuates over time. It is built up by you and your employer making contributions to the scheme. The income that you draw from the pension is up to you, but will be dependent on the size of your pot. Income is, therefore, not guaranteed and is subject to the investment performance of your pension.
Should You Transfer Your DB Pension Plan?
Transferring a DB pension means you take the value offered by the scheme (called the cash equivalent transfer value, or CETV) and transfer it to a DC scheme, taking on investment risk and giving up the guaranteed income, while getting much greater flexibility and the ability to pass on your pension pot to beneficiaries after death.
With interest rates increasing rapidly from historic lows, CETVs of DB pensions have seen significant falls from what were very attractive transfer values, over the last few years. Because the guaranteed income is so valuable, under almost all circumstances, the Financial Conduct Authority believes the pension shouldn’t be transferred unless there is a compelling reason to transfer and give up the guaranteed income.
In order to transfer a DB scheme, advice has to be given by a U.K. regulated adviser, which typically costs at least £2,500 just for a report – and the advice may still be to remain in the scheme.
Reasons to Transfer Your DC Pension(s) into a Self-Invested Personal Pension (SIPP).
• Consolidation of pension plans to reduce administrative burdens
• Increased investment options for potentially greater performance
• Active management and ongoing advice
• Increased ﬂexibility and retirement options
Key to Pension Planning
Unfortunately, there are still plenty of advisers recommending that pensions be transferred into high commission-paying products with undisclosed fees. It goes without saying that these should be avoided, but they’re not always obvious, so a second opinion is invaluable to ensure the advice is clear, fair, and not misleading.
As a Private Chartered Financial Planner, my role is to help you build a robust and holistic ﬁnancial plan that is bespoke to you to help you achieve your goals and objectives, whatever they might be.
If you have questions around pensions that you might have, would like existing pensions reviewed, or would like a second opinion on a recommendation that you’ve received, please feel free to contact me at email@example.com.
Jamie Bubb-Sacklyn is a fully qualified Chartered Financial Planner & Private Wealth Manager with deep experience in sophisticated wealth structures, corporate protection solutions, inheritance tax planning, and investment structuring.
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