Question:
I am considering transferring my final salary pension. Is it just stock market risk that I need to be concerned by?
Answer:
Low gilt yields and favourable markets have made defined benefit (DB) final salary pension transfer a hot topic right now.
It is important to understand that under a DB pension, the risk and the obligation to pay a fixed amount lies with the employer, whereas once transferred to a Defined Contribution (DC) pension or Retirement Trust Scheme as they are commonly known in Jersey, the risk lies firmly with the individual and payments are not guaranteed.
For people with a very long-life expectancy a DC pension introduces risk that may not be in their best interests when compared to a final salary pension which pays guaranteed income for life.
If you are quite comfortable with investment risk, it may be worth making a transfer to reduce the risk of dying without receiving the full value of the pension scheme.
Another risk to consider is corporate failure, where the employer is no longer able to honour its pension commitments.
It is important to consider that a DC pension also allows for wealth to be passed on to the next generation on death in a manner that DB pensions do not facilitate as a reward for the risks involved. I would highly recommend that you seek professional advice in this regard as you need to be fully aware of the risks involved as this decision is irreversible.
About the Author
John Leonard, Head of Business Development
Tel: 01534 488773 • Mobile: 07797 742811
John Leonard is responsible for our Private Clients based in Jersey. John recently joined SaSo Strategic Advisers in August 2017 having spent the previous 7 years in an established financial services business where he was responsible for providing advice to both private and corporate clients in all areas of financial planning.