Final salary pension transfers on the rise: should you stick or twist?

Final salary pension transfers on the rise: should you stick or twist?

Based on data compiled by our mutual associates, Mercer, deficits in traditional company pension plans rose by 20% in Ireland last year (Independent Ie, 2019). Simultaneously, the number of people transferring their final salary pension scheme has risen by 25% over the past year (Royal London, 2018).

The forecasted corporate deficit in Ireland has grown from €1.3bn in 2017 to €1.6bn at the end of 2018, largely due to poor equity market performance in Q4-18. At the same, despite DB (Defined Benefit) schemes promising a guaranteed and usually inflation proofed income in retirement, which is based on years of service and final salary; more and more people are transferring their DB pension towards a DC (Defined Contribution) scheme. Why is this?

Top Reasons to Twist:

Increasing numbers of DB pension holders are opting to transfer their pensions - here's some of the key reasons why...
Achieve greater flexibility: Rather than having to take a set pension on a set date, having much more choice to decide how and when you would like to receive your pensions. Notably, you have the option to take a lump sum and ‘front load' your pensions so you’re able to enjoy your savings, and scratch that travel-bug, earlier into retirement; hopefully at a time in your life when you’re fit and healthy enough to take full advantage of travelling the world.
Leave a legacy: It’s important to be aware that the longer you live the more value you get from your DB pension scheme. Under this type of scheme, the benefits typically end when you and your spouse die with no future income being passed down onto your children or grandchildren.Therefore, if you are concerned about your health, and a shorter life expectancy, you might be wise to consider a transfer. This is because under a defined contribution scheme, you can pass your pension onto whoever you wish, providing you greater flexibility and removing the risk in providing a legacy to your loved ones.
Gain access to an increased lump-sum: Although it's worth noting that this lump-sum may be subject to taxation, dependent on your individual circumstances.
Avoid risk of employer insolvency: “The black holes in the defined benefit pension schemes of Irish listed companies rose by 20% last year” (The Independent Ie, 2019). Due to the rising pressure on the performance of corporate pension schemes, including those of Eircom, Bank of Ireland and AIB, you should be mindful that if your company pension scheme falls into a large deficit then your benefits could be reduced, depending on the individual circumstances.

Take Control of Your Savings

So in summary, the key advantages which a DC pension may hold over a DB scheme include the potential for more flexibility in terms of access to income, greater lump sums, and flexibility for succession planning. You should note, however. there are risks involved with a transfer.

So while more and more people are transferring out of their traditional salary-related pensions for the reasons outlined above, whether this is a good idea or not for you depends entirely on your personal situation. For some, a guaranteed salary-based pension that lasts a lifetime and is unaffected by market uncertainty might be the optimum solution. Therefore before you make the decision to transfer you should be aware of the top reasons to ‘stick’ to a DB scheme, as outlined below, and discuss your individual circumstances with a qualified advisor.

Top Reasons to Stick:

The Taxman: From a tax relief perspective, DB pensions are treated quite favourably. In practice, if you have a particularly large pension pot you could be under the Lifetime limit (currently 2m euros) inside a DB scheme but the same benefit could be above the limit if transferred into a DC arrangement.
Greater certainty: By sticking with your DB pension, you will receive a regular payment that lasts as long as you live but by choosing to transfer your pot you’ll be faced by a ‘longevity risk’; again, your individual health circumstances will come into play here.
Inflation-proofed: If you retain your DB scheme, you’ll most likely have a measure of guaranteed protection against inflation. With a DC pension, however, you or your advisor will need to manage the impact of inflation; do you want to take the gamble?
Spousal provision: Under Irish law, a DB pension must provide a minimum benefit to the surviving spouse whereas if you transfer to a DC scheme to buy an annuity, you’ll need to pay extra for a ‘joint life’ policy to ensure part of your pot is passed on when you die.
More stability: We all know investments can go down as well as up and by opting to transfer to a DC scheme you are exposing yourself to the uncertainty of the stock market.

In order to understand whether to ‘Twist or Stick’ with your pension, you should speak to a financial advisor who can offer you a bespoke and data-driven assessment. As most likely the best option for you and your finances will depend entirely on how you wish to spend your retirement. To take control of your retirement and speak to a local financial advisor today by registering your details above or contacting us at info@imperius-am.com. Our dual-qualified advisors (in Ireland AND the UK) - who specialise in retirement planning for clients with pensions in more than one country - are uniquely qualified and experienced to help you optimise your financial future.

Sources:

- Press Releases, Royal London, May-2018

- Deficits in traditional company pensions plans rise to 1.6bn, The Independent.IE, 2019

Issued by Imperius Asset Management Limited, which is authorised and regulated by the Central Bank of Ireland. Registered address 37 Main Street, Ongar, Dublin, 15, Ireland. No. 460677.