Post by Deleted on Jul 31, 2016 19:00:48 GMT 7
In brief - the guy can either take £40,000 a year or £1.3 million lump sum, what would you do?
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Sky-high payouts and a growing desire to avoid inheritance tax are just two of the factors driving a surge in the number of retirees willing to swap their “gold plated” lifelong pension incomes for a one-off cash sum.
Taking such a step means turning a long-held tenet of shrewd financial planning on its head.
The issue relates to the millions of people who have “defined benefit” or “final salary” pension entitlements but are yet to draw the income. These once-common schemes promise to pay retirees an income related to their wage and the number of years of employment. There are often generous perks such as inflation-proofing or spouses’ benefits.
Many schemes are now in crisis, with inadequate funds to pay the promised pensions. This can be a crippling problem for the business, which has to prioritise its ailing pension fund ahead of other, vital investment in growth or future employees.
Some are offering savers “irresistible” deals to leave, experts have reported, as they struggle to fund their future liabilities. And the terms are so good that even cautious savers – who hugely value a guaranteed, inflation-linked income – are being tempted.
This includes Telegraph Money reader Simon Major. He has always known that his final salary pension scheme makes him one of the lucky ones.
As a lifelong employee first of ICI and then the company that bought it, AzkoNobel, he is in line to receive two thirds of his final salary as a pension income once he has reached 40 years of service – one of the most generous examples of “gold-plated” pensions that exist.
This year, aged 59 and with almost 39 years of service under his belt, Mr Major asked about taking redundancy. When the company came up with a package that tempted him, he examined his options. He knew it was possible to take 25pc of the value of his pot tax-free, or otherwise leave the money where it was and receive a higher income for life.
When he sought professional guidance on this, however, the advice urged him to go even further. One financial adviser, and then another, suggested he transfer out of his final salary scheme completely and take his chances by investing the cash-in payment that he would be given instead.
“My understanding over the past four decades is that there is nothing better than a gold-plated, final salary pension,” he said, “and I would have thought that anyone who tries to tell me otherwise is simply out to con me.”
That has indeed been the received wisdom. It may have suited advisers, often incentivised by commissions or other inducements, to suggest a switch, but the deal seldom worked to the benefit of retirees. Until now.
Mr Major is one of an increasing number being offered a transfer value for their final salary pension high enough that they can invest the money within a self-invested personal pension and then enjoy dividends and bond interest that matches the income promised by their scheme.
This route gives them the chance to keep their capital intact, or even grow it. And, thanks to pension freedom reforms introduced last year, it would no longer attract inheritance tax.
In Mr Major’s case, his salary and years of service mean his ICI pension will pay an annual income of over £40,000, indexed to rise with inflation.
Tax rules mean that savers’ pension pots must not exceed £1m. To reach a cash value in the case of final salary schemes – where there is no actual pot of money – the initial annual income promised is multiplied by 20 to give a figure for comparison purposes. On this basis, Mr Major’s fund was worth a little more than £800,000.
www.telegraph.co.uk/pensions-retirement/financial-planning/my-pension-dilemma-40000-a-year-for-life---or-13m-now/
....................................................................................
Sky-high payouts and a growing desire to avoid inheritance tax are just two of the factors driving a surge in the number of retirees willing to swap their “gold plated” lifelong pension incomes for a one-off cash sum.
Taking such a step means turning a long-held tenet of shrewd financial planning on its head.
The issue relates to the millions of people who have “defined benefit” or “final salary” pension entitlements but are yet to draw the income. These once-common schemes promise to pay retirees an income related to their wage and the number of years of employment. There are often generous perks such as inflation-proofing or spouses’ benefits.
Many schemes are now in crisis, with inadequate funds to pay the promised pensions. This can be a crippling problem for the business, which has to prioritise its ailing pension fund ahead of other, vital investment in growth or future employees.
Some are offering savers “irresistible” deals to leave, experts have reported, as they struggle to fund their future liabilities. And the terms are so good that even cautious savers – who hugely value a guaranteed, inflation-linked income – are being tempted.
This includes Telegraph Money reader Simon Major. He has always known that his final salary pension scheme makes him one of the lucky ones.
As a lifelong employee first of ICI and then the company that bought it, AzkoNobel, he is in line to receive two thirds of his final salary as a pension income once he has reached 40 years of service – one of the most generous examples of “gold-plated” pensions that exist.
This year, aged 59 and with almost 39 years of service under his belt, Mr Major asked about taking redundancy. When the company came up with a package that tempted him, he examined his options. He knew it was possible to take 25pc of the value of his pot tax-free, or otherwise leave the money where it was and receive a higher income for life.
When he sought professional guidance on this, however, the advice urged him to go even further. One financial adviser, and then another, suggested he transfer out of his final salary scheme completely and take his chances by investing the cash-in payment that he would be given instead.
“My understanding over the past four decades is that there is nothing better than a gold-plated, final salary pension,” he said, “and I would have thought that anyone who tries to tell me otherwise is simply out to con me.”
That has indeed been the received wisdom. It may have suited advisers, often incentivised by commissions or other inducements, to suggest a switch, but the deal seldom worked to the benefit of retirees. Until now.
Mr Major is one of an increasing number being offered a transfer value for their final salary pension high enough that they can invest the money within a self-invested personal pension and then enjoy dividends and bond interest that matches the income promised by their scheme.
This route gives them the chance to keep their capital intact, or even grow it. And, thanks to pension freedom reforms introduced last year, it would no longer attract inheritance tax.
In Mr Major’s case, his salary and years of service mean his ICI pension will pay an annual income of over £40,000, indexed to rise with inflation.
Tax rules mean that savers’ pension pots must not exceed £1m. To reach a cash value in the case of final salary schemes – where there is no actual pot of money – the initial annual income promised is multiplied by 20 to give a figure for comparison purposes. On this basis, Mr Major’s fund was worth a little more than £800,000.
www.telegraph.co.uk/pensions-retirement/financial-planning/my-pension-dilemma-40000-a-year-for-life---or-13m-now/
