Should I Transfer My Final Salary Pension to a SIPP?

Choosing whether to transfer a final salary pension to a SIPP is an important decision. And what makes financial sense for one person may not be good for you. Here are some of the key considerations.

Final salary pension vs SIPP: choose carefully…

Deciding whether to move your final salary pension rests on several – sometimes conflicting – considerations. And you have to get the decision right. Once you have left a final salary pension you cannot reverse the decision. That’s why it’s always best to sit down with a financial adviser to talk through your personal circumstances before deciding whether to transfer your final salary to a SIPP.

Are you prepared to lose?

A key consideration when deciding whether to move from a final salary pension to a SIPP is your tolerance for loss. A SIPP represents something of a gamble compared to the guaranteed income of a final salary scheme. Unless you have other investments or pensions to fund your retirement, you will need to think carefully before deciding whether you can shoulder the responsibility for making smart investment choices to sustain income through you retirement.

Are you able to transfer out of your final salary pension?

Before you begin deciding whether to transfer your final salary pension to a SIPP, it’s prudent to find out whether you are entitled to transfer at all. You may not be able to transfer if your defined benefit pension is part of an unfunded public sector scheme, if your pension is already in payment or if you have less than a year before your normal retirement age.

What happens if your employer becomes insolvent?

Scare stories in the media about pension deficits and employer insolvency have made some savers question whether their final salary pension is as secure as they thought. As of February 2018 there were 5,588 active final salary pension schemes in the UK. Of these 3,608 schemes were in deficit with a cumulative aggregate funding gap of £72.1 billion in the final salary pension setup as a whole. (Figures obtained from the Pension Protection Fund.)

However it’s important to note that the government has implemented a measure of protection for savers via the Pension Protection Fund. If your employer becomes insolvent and is no longer able to pay your final salary pension, the PPF ensures that once you reach age 65 you will receive 90% of your pension (up to a maximum of ££40,020).

Death and inheritance

Nobody likes to think about the unexpected. But if you have serious health considerations it may make sense to transfer from a defined benefit scheme to a SIPP, which can simplify access to your savings. Transferring to a SIPP also makes it easier to provide for your loved ones. Most defined benefit schemes only pay around half of your pension (in the form of monthly payments), to your spouse after you’ve gone – and often only if you’re married.

Read the rules…

If you’re still interested in transferring your final salary pension to a SIPP, the next step is to read through the rules of the company pension scheme. Your (former) employer will be able to give you a copy. This document will give you full details of the benefits you are entitled to with your scheme and will give you the knowledge you need to talk openly with a financial adviser.

Talk to an adviser

If your final salary benefits are worth more than £30,000, talking to a financial adviser is compulsory before you transfer out under rules implemented by the Financial Conduct Authority. But no matter what size pension you have, it’s almost always a good idea to talk to a good independent financial adviser before making big decisions.

Once you transfer out of a defined benefit scheme there’s no turning back. A financial specialist can look at your financial situation as a whole and help you work out whether transferring to a SIPP or staying in your defined benefit scheme will give you more financial security for your retirement.

We can help

Here at Prydis we have helped thousands of savers make prudent decisions for their retirement. Our independent advice is part of the reason we earned our prestigious Chartered Financial Planners designation: the gold standard for financial planning firms. It means you can be sure our practice is held to rigorous standards of professional qualifications, ethics and compliance. Ready to get started? Get in touch.

Nothing in this article construes, or is intended to construe, financial advice. You should always seek advice from a professional financial adviser who is familiar with this type of pension planning, to ensure any recommendations made will be suitable for your needs and circumstances.