I am a 35-year-old UK citizen who now teaches abroad and is classified as a non-resident for tax purposes. I created almost five years of pension in the University Retirement Scheme (USS) while working for a university in the United Kingdom. This jackpot costs approximately £ 33,000 and with 65 it would get approximately £ 7,000 as a lump sum and a little more than £ 1,000 a year as a defined benefit final-benefit pension.
If I transfer this to a self-invested personal pension (SIPP) and bought a tracker, I think that the £ 33,000 could be accessible at 55 and with a supposedly modest growth of 3 per annual cent would be a better investment. Do you think it would be better to change? He is unlikely to teach in the UK for the foreseeable future and, even if he does, with problems with USS, it is unlikely that he can contribute more.
Paul Taylor, executive director of financial adviser McCarthy Taylor, says a number of factors should influence his decision, including personal circumstances, attitudes and fiscal position. You should seek tax advice in the country of your residence.
Upon retirement, the USS plan will provide the pension linked to listed inflation, payable for life.
Currently, transfer values are unusually high, since they are based on low gold yields, which actuaries use to evaluate the amount of funds needed to guarantee benefits for the average life expectancy period. As gold yields increase, transfer values will fall.
Transferring personal invested pension (SIPP) to self-control will mean that the benefits of retirement they are based on returns and charges during the investment period. Therefore, the risk and cost of the investment would pass from your former employer to you. The quoted annual pension may seem modest, however, the benefit of a safe retirement income can not be overstated.
The cost of the advice to transfer, the continuous management of the investment and the advisory fees are all additional expenses to take into account. Before changing, you must obtain a transfer value analysis report. This will analyze the growth rate required to match the benefits of the existing scheme. It is likely to be higher than the 3 percent that you cite and it should be sustainable in the context of your attitude to investment risk. An independent financial adviser should consider a personal pension based on a lower cost platform, as an alternative to a SIPP.
Regarding their concerns about college plans, they have the security of the Pension Protection Fund if the scheme fails This compensation is at a lower level than the defined benefit, but still provides valuable protection.
When you retire from the USS scheme, the annual pension will remain in effect for life and if you have a spouse or dependent, you will still be paid a reduced pension in case of death.
Conversely, transfer to a SIPP or personal pension can provide flexible death benefits to whomever you choose, in any format that is appropriate for them, which includes inheriting the pension without inheritance tax.
In summary, transferring the pension will give you flexibility of retirement benefits and death benefits and broader investment options, but you will lose the security provided by the defined benefit, incur costs, be exposed to the risk of the investment and there is no guarantee of that the growth of the new pension will provide a sufficient return to match the USS pension.
As a result, it seems unlikely that it would be best for you to transfer, unless you have other substantial assets and do not expect to depend on your retirement pension.
Martin Tilley, director of technical services, Dentons Pension Management, says that it is always prudent to keep track of deferred pensions and make sure you have a complete understanding of how and when all the potential benefits can be paid
The freedoms of retirement, introduced as of April 2015, offer a less rigid system of payment of benefits, allowing members to take benefits at a younger age and in a more flexible way than from a defined benefit scheme. This, together with the potential to transmit any residual funds left at the time of the member's death to others, has increased the popularity of the defined benefit scheme transfers funded in recent years.
By introducing the freedoms of pensions, the government recognized the importance of people understanding the value of defined benefit schemes and the guarantees that they would be giving up the transfer. It implemented a legal requirement that when the offered cash equivalent (the transfer value) exceeded £ 30,000, the member should receive expert advice from a qualified specialized transfer consultant. In fact, the transfer scheme can not release the transfer to another registered pension plan unless it is certain that the member has obtained the appropriate advice.
For any transfer from a defined benefit scheme to a defined contribution scheme or purchase of money, the member must understand that it assumes all the risks and charges under the reception scheme and loses the guarantees that the transfer scheme had provided.
For example, the member may live longer than expected and their money purchase fund may be exhausted before they die. They also assume the investment risk. For example, the investment strategy chosen may not provide a sufficient fund to match or improve the guaranteed benefits provided. Even the use of a single low-cost tracking fund could be risky if it lacks diversification between asset classes and geographic regions.
In addition, the member assumes the costs of the transfer and the ongoing administration of the new scheme, and both will have an impact on the return on investment and the expected benefits.
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result derived from the trust placed in the answers, including losses, and exclude liability to its full extent.
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