Answered by Neil Adams
Take charge of your pension assets
Those in poor health tend to be among those who have the most to gain from a potential pension transfer, especially those who might have significant final salary benefits.
Final salary benefits
One of the great benefits of a final salary pension is the opportunity to retire early through ill health and still enjoy a full guaranteed pension. However, final salary benefits are costed on the basis of normal longevity i.e. the cost of providing lifetime benefits for someone who’s expected to enjoy average life expectancy.
As a result, for those who might not be expecting to spend 20 years or more in retirement, a final salary scheme is an expensive way to generate an income. Most final salary arrangements can be structured to offer a reduced widow’s pension (usually of 50%) but again this an expensive way to provide a widow’s pension – especially as the income will be taxed.
Taking the cash
For many in this situation it makes more sense to request a cash equivalent transfer value (CETV) from their existing scheme or schemes.
Once you’ve taken professional advice on the transfer – as is now required by law for transfers worth over £30,000 – you can transfer to a money purchase arrangement and move your portfolio into what’s called ‘flexi-access’ drawdown.
This will give you complete freedom to draw down lump sums as and when you might need them (subject to the tax rules) and to structure the level of income that’s most useful to you.
Structuring a widow’s pension
With final salary arrangement, you can also structure a widow’s pension that will be subject to tax. However, once your wife dies any remaining value in your pension savings is lost, regardless of how long you may have been drawing benefits.
This is quite different from drawdown where your remaining pension assets will be passed to your chosen beneficiaries free of tax (if you die before age 75).
Those who may have older money purchase arrangements such as Section 32 (buyout bond) contracts, Section 226 (retirement annuity) contracts or additional voluntary contributions (AVCs) and free-standing additional voluntary contributions (FSAVCs) may find they can’t access drawdown with such plans. In this situation, a transfer may also be the best way to provide access to these savings at a time when you need it most.
Make sure you seek advice
With a major change in lifestyle with which to contend, it makes good sense to seek unbiased professional financial advice. A good adviser can help you to utilise your pension assets in the most effective way and ensure that a lifetime of hard work isn’t lost just because your health has let you down.
Frequently Asked Pensions Advice Questions
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