Transferring out of a final salary pension is a big step, but extracting just a portion of your pension could offer the best of both worlds.
Transferring a pension is a big step, especially if you have all or most of your lifetime pension in a single salary-related scheme.
However, there is growing interest in a halfway house: a partial transfer arrangement, where salary-related scheme members take part of the value of their pension as a transfer but leave behind a portion of their rights to a regular income. Schemes are not obliged by law to offer such transfers, and only around one in six does at the moment. But with companies such as Ford UK having recently announced a partial transfer option, we may start to see others follow suit.
On the face of it, a partial transfer could offer some people the best of both worlds when it comes to pensions.
Most people already expect to get a state pension when they retire, and if they also get a partial pension from their company scheme these two pensions could together generate enough regular income to provide financial security. At the same time, taking part of a pension as a capital sum could give retirees new options such as paying off debts, retiring slightly earlier or improving their home.
As with a full transfer, regulators warn savers that even if they only go for a partial transfer, they are still giving up something very valuable. As ever, the vital move is to take – and listen to – impartial advice about whether such a transfer is right in your particular situation. Taking advice is mandatory for transfers of more than £30,000, even if these only represent a partial transfer.
One reason why Ford UK’s pension scheme is offering partial transfers is that many workers stay with the firm for a long time. For workers who move around and have multiple pensions, the option of a partial transfer may be less relevant, as they can simply choose to transfer one out in its entirety and leave the others untouched. The partial option may be of more interest to Ford workers and others for whom a full transfer is a big all-or-nothing choice.
One complication with partial transfers, however, is that final salary pension scheme rules are rarely simple. A useful way to visualise the complexities is to consider a cake covered with icing.
Looked at from the outside, the cake appears to be a single homogeneous lump. But as soon as you cut into it, you find that there are layers of jam, cream and sponge.
Pensions are remarkably like cakes in that a pension is actually made up of distinct layers. Each of these layers may have different properties. For example, pension built up in the years before 1997 may be treated differently from pension accrued since then. Contributions since 1997 may have better inflation protection and could also have better protection if an employer goes bust. Likewise, layers of your pension may have been designed to look like the state pension in terms of provision for widows/widowers and annual increases, while other layers may not have these valuable features.
A key subtlety to understand when doing a partial transfer is whether you are getting a specific percentage of each pension layer (by portioning the ‘cake’ vertically) or whether the transfer scheme is extracting some entire layers and leaving others behind. It’s essential to get financial advice to clarify this point.
Ford has opted to keep things as straightforward as possible by offering scheme members a single 50% transfer out at retirement. This greatly simplifies communications around the option and gives long-serving workers new choices.
It’s good to talk
If you are considering transferring a pension and have long service in a single scheme, it might be worth talking to your scheme and employer about whether a partial transfer option would be available for you. Even if it isn’t, if enough scheme members express an interest in partial transfer, and especially if a trade union lends its support, pension trustees might be willing to consider introducing the partial transfer option.
Steve Webb is director of policy at Royal London.