Should I cash in a final salary pension?

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Traditional wisdom says a gold-plated final salary pension is a financial asset that should be safeguarded and protected – but opinions are starting to change as big companies struggle to tackle pension black holes of £900 billion.

FTSE350 companies – essentially the largest private firms in Britain – are offering huge buy outs to workers willing to give up their final salary rights.

Since Brexit, these incentives have only increased and it’s anyone’s guess whether they will continue to grow or slump.

The Financial Times says some employees have been offered cash lump sums of up to 30 times of their projected retirement incomes.

Who can move their money?

Close to 15 million retirement savers have final salary pensions.

A large number cannot move their pensions because the government says they can’t because they are civil servants or work in the public sector.

Moving the money is a risk because the new pension will not offer a guaranteed retirement income based on final salary and length of service. Instead the pay-out will depend on investment performance.

Other important benefits could be index-linked spouse pensions and guaranteed annuity rates that are much more impressive than those available in the current market place.

Expats or those considering a move abroad can transfer their final salary cash to a Qualifying Recognised Overseas Pension Scheme (QROPS).

Sheltering retirement cash in a QROPS

QROPS offer shelter from the lifetime allowance, flexible access with some schemes and up to a 30% tax-free lump sum among other features.

Expats can move where they like as many QROPS providers allow retirement savers to base their pensions in a financial centre such as Malta or Gibraltar and live elsewhere.

The Financial Times also reports that final salary pension transfer inquiries have jumped 10% since the Brexit referendum vote as news spreads of the enhanced pay-offs.

In the past, moving out of a final salary scheme has been frowned upon by regulators and advisers because of the risk of losing benefits that can never be replaced.

Now, post-Brexit valuations coupled with pension freedoms are making many IFAs reconsider their former recommendations.

Another point to consider is whether the company is likely to go bust, which would see the pension fund go into protection. Doing so would see benefits for many retirement savers drop by 10% and a cap on annual payments.

Transferring out of a final salary pension to a QROPS is now worth looking at if the price is right.

Further QROPS Information and Guidance

For more information about QROPS and the benefits it provides, download the iExpats QROPS Guide or complete the Get Advice form.

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