Or not. Many people don’t naturally first think of the value of their retirement plan.
If you are in the fortunate position of having a defined benefit (also known as a “DB” or “final salary”) pension, perhaps you have read in the press about the high “transfer values” being offered to folks who choose to transfer out of their existing DB plans. This transfer value is the amount that your pension provider is willing to pay you to transfer out of its plan – forever – to set up a new pension yourself, with help from advisors. The value is a multiple of the pension you’d receive times a certain number – and with numbers quoted ranging from 20 to 40, the amount can be an eye-opener.
You may be concerned about headlines regarding high levels of underfunded plans, or schemes that although fully funded, are closing plans to new accruals, i.e. not adding anything to what you’ve already accumulated. Some advisors portray transferring out of a defined benefit plan as a way to be able to take the 25% tax free cash that’s been enjoyed by the new pension freedoms available for the last couple of years with the UK Pensions Freedom Act.
But do you know your “transfer value” – it may be on your latest annual pension statement or perhaps you need to write to your scheme administrator and request it. Even if you have never thought about transferring your pension, it’s very good to know what this value might be.
Unrelated to concern’s over a scheme’s health or perhaps recklessly releasing cash, there are other much more interesting and compelling reasons to at least consider a transfer.
+ You take control of your likely largest financial asset. You know the exact amount that you have for your retirement, taking away the life expectancy gamble of dying early.
+ You can pass on the value to your family, it doesn’t end when you (or your spouse) dies, and will likely provide better future income for your husband or wife, as it’s not automatically reduced to a widow/widower’s pension upon your death.
+ You have complete flexibility on how much you how want to take and when you draw it, you’re not tied to a fixed monthly amount. So as your income needs (and tax situation) change over the years you’re retired, you have flexibility in planning both.
+ Transfer values are currently so high that a lot of the investment risk can be reduced. A 2% net investment return can provide the same level of pension, with some left over.
+ If you do need some cash, perhaps to pay off a mortgage or to help your children buy a home, taking the tax-free portion at age 55 is an option, although this does put a big dent in the amount left for future investing. But if you have other sources of retirement funding it may be something to consider.
Knowing your transfer value is just the first step. You may have a recent annual pension statement that includes the transfer value. Or you may need to write to your pension scheme administrator and request your transfer value. They must respond to you within 30 days, and the value they give you will be valid for 3 months, during which time you need to take advice whether this transferring out is good – or bad – for you. Take your time! But as a first step, check that value.
Pamela Morgan CPA
UK Liaison and Guest Blogger
Investme Financial Services LLC