TRANSFER OPTIONS

SO where can you put your money if you do decide to transfer?

Typically, people are moving cash into personal pensions, defined-contribution pensions or using income drawdown.

For more flexibility, and to suit needs exactly, there are also hybrid products where you can combine annuities and drawdown, guaranteeing an income for life to pay the bills and also have a flexible pot to dip into as and when.

EXAMPLES

JOHN, aged 62, is divorced with one daughter. He smokes and has diabetes. He is in a deferred finalsalary scheme and is currently considering his options.

He is thinking about retiring, but his deferred pension retirement date is set to 65, so if he takes benefits early they will be reduced.

He has been given a transfer value of £405,000 by the scheme trustees.

The final-salary scheme will pay a tax-free lump sum of £73,085 at age 65, with an annual pension of £10,962, and a spouse’s pension of 50%, all benefits rising in line with LPI (Limited Price Indexation, usually the lesser of RPI and 5%).

OPTION 1:

Retain the final-salary pension and take the benefits at 65, or take benefits early if the scheme allows – but with a reduction in tax-free cash and the annual pension.

OPTION 2:

Or at 62, use the transfer value to invest in drawdown, where he can withdraw as little or as much as he wants, when he wants.

Take the tax-free cash of £101,250 (25% of £405,000) and invest the rest (£303,750).

A relatively safe withdrawal rate could be about 3.5% a year, generating an income of around £10,631 but this isn’t guaranteed.

OPTION 3:

Or again at 62, use the transfer to buy an annuity and income drawdown.

Take the tax-free lump sum of £101,250 and invest £271,312 in an annuity to match the starting income of the initial final-salary scheme (note the income is not index linked but is guaranteed). Invest the balance of £29,249 in drawdown and use as he wishes.