Ask the IFA: What are the disadvantages of a final salary pension transfer?
The numbers might look attractive and there are stories in the press of people pocketing hundreds of thousands through a final salary pension transfer. There are lots of disadvantages of a final salary pension transfer though and here are seven reasons to take stock of the reality of leaving a defined benefit scheme.
Your final salary scheme pension rights represent a significant percentage of your overall pension rights and you don’t have substantial other investments to fall back on.
If you remain a member of the DB scheme no investment decisions need to be made but if you do transfer your chosen investments will need to be regularly reviewed to manage returns and volatility.
You will give up a guaranteed inflation linked income in retirement.
If you are married or in a civil partnership you could be giving up a potentially valuable survivors pension, especially if your spouse or civil partner will not have sufficient pension provision of their own.
If you enter income drawdown you can draw as much or as little income as you want, whenever you want. This can be a useful tax planning tool but it brings temptation and your retirement fund could be depleted quickly if you draw too much, too soon.
If the fund you invest your pension in performs poorly you could be much worse off in retirement than you would have been had you not transferred.
If the payment of death benefits is important to you, it might make more sense to review your protection policies to see if a life insurance policy could meet this objective without forgoing the security of your final salary scheme pension promise.
Please note, this list is not exhaustive and there may be other reasons, on both sides, for approving or rejecting a pension transfer request.
The value of your investment and income from it can go down as well as up and you may not get back the full amount invested. Accessing pension benefits early may impact on the levels of retirement income and is not suitable for everyone. You should seek advice to understand your options at retirement.