It is estimated that thousands of people give up their final salary entitlements each year. This has prompted fears that they are not warned about the value of what they are losing. Usually, final salary schemes promise to pay their members guaranteed, high incomes for life. Unfortunately, the way you withdraw your income is strictly controlled. Moreover, you cannot pass the pension to your partner or dependent. You should note understanding final salary transfers can help you make the right decision. The following are some of the things to know before you ditch your pension.
Checking the Numbers
You need to ensure you are getting cash equivalent transfer value. In this case, you need to know the amount of money you will get paid in exchange for the pension. This transfer value is easy to understand, but it is difficult to get a value you can compare with. You may be provided with up to four varying figures that show the value of the final pension. They include the annual income you get at the time you left the scheme. This is usually a projected income based on different assumptions such as inflation.
Right Time to Transfer
When it is nearer the retirement, you will get a larger transfer value. However, there are many reasons a scheme can offer you less or more than expected. The key factor is the funding position. This is the ratio of assets to liabilities of the scheme. Taking into account the way liabilities are measured, it becomes difficult to determine this ratio. Thus, when various investments are doing well, the funding position will dramatically improve.
Your Health Status
Ideally, final salary schemes provide a ‘spouse’ pension that pays out two-thirds or half of the member’s pension to the surviving partner. However, schemes cannot allow you to turn off this benefit even if you are single or the partner does not require the additional income. Thus, you should consider transferring out of your scheme.
You should note that all pensions have a given lifetime cap. The excess amounts are subject to once the pension is crystallized or when you take an income at the age of 75. In some instances, you can easily breach the lifetime cap by transferring it. When you transfer it as cash, you will need to pay a tax charge of 55%.