I am looking for advice on whether I can transfer my frozen final salary pension to my children. Is this possible?
I have a frozen company defined benefit pension with a current pension value up to April 2014 of £12,500 a year, which is subject to annual increases in line with inflation.
I also have an ongoing company defined benefit pension showing an accrued pension as of March 31 2014 of £28,785 a year.
In the future, even with early retirement the projected benefits will take me over the lifetime allowance. I am aged 48 and have two children.
MM, by email
Should your wife predecease you, a defined benefit (DB) pension should have a dependant’s pension payable until your children reach a certain age, typically age 21, says Danny Cox, a financial planner at Hargreaves Lansdown.
He said: “You should check the scheme rules on this point. The amount of pension is well within the statutory protection limit for DB pensions, so if the pension scheme were to run into trouble, 90pc of your pension would be protected by the Pension Protection Fund.”
From April 6 this year, if you were to transfer this final salary pension to a personal pension or stakeholder pension, and you died before age 75, the value could be paid to the beneficiaries of your choice tax-free. Upon death after age 75, the pot could still pass to your children but would be subject to an income tax charge, the amount of which would depend upon their other taxable income and the amount of money they withdrew per tax year.
Mr Cox said that the key value for money test for pension transfers of this type was to compare the amount of guaranteed income that would be paid at retirement from the DB pension scheme with the amount that might be payable if the value were transferred into a private pension. Bear in mind that a transfer involves the investor giving up guarantees and taking on the investment and interest rate risk themselves.
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Where the critical yield is more than 7pc a year it is unrealistic to expect the private pension to match, or beat, the level of income from a DB pension. This may not necessarily mean a transfer is always a bad idea.
Also from April 6, in most cases you will not be able to transfer a final salary pension plan to a private pension without taking financial advice. This is likely to cost a minimum of £1,250 but is worth paying to ensure you make the right decision.
“Generally speaking the value of DB pensions is so good, it is worth holding onto these and aiming to provide succession plans, gifts and legacies to children using other resources,” Mr Cox said.
He added: “Hitting the Lifetime Allowance is also reasonably inevitable, but not a reason to stop funding your current pension scheme. The employer contribution, tax relief and guarantees should still make the scheme viable for you, and only the excess pension over £1m (from April 2016) will suffer additional tax.”
Source: The Telegraph (U.K.)