You need several good reasons to give up guaranteed lifetime income and take on investment risks, costs and the extra responsibility of looking after your own fund.
Here are five points you will want to be sure of before proceeding with the transfer:
1. The transfer value represents at least fair value and ideally is generous versus the pension benefits left behind.
2. You are comfortable with the extra responsibility of looking after an investment fund.
3. You can cope with a lower level of income later in life if the fund gets run down, this is usually a function of having other sources of income and capital.
4. You can make better use of the alternative withdrawal options offered by the transfer route as compared to the scheme cash and income options.
5. You may have other income resources and do not need to draw income from your pension
For the second of these points it helps if you have had some experience of investing savings in things like ISAs, or perhaps an invested personal pension account from a different period of employment.
Having other savings and sources of income in retirement is a good way of mitigating the investment and longevity risks of going the transfer route. The ability to control pension income from one year to the next can often help those with other savings and income to be more efficient.
On the last point there are lots of ways in which individuals might want differing benefits to those offered by the scheme for example:
- It suits you and saves you tax to be able to take cash lump sum early and defer the income withdrawal.
- The transfer is big enough that you can preserve its capital value for the next generation whilst still having enough income at retirement.
Larger transfer offers can be compelling because they often belong to people with other assets and income such that they don’t need a guaranteed income at retirement and would prefer to use the transfer value in a completely different way, for example to preserve its value as part of the family assets.
But smaller transfers can also make sense where there is a clear way to use the money which makes more sense to the individual than to take the life time pension.
Ill health can be a compelling reason, if it’s clear your life expectancy has been shortened compared to the average then the chances are you and your family will get more cash from a transfer than staying in the scheme.