To transfer or not?
Changes to legislation over the last few years have made it possible to transfer value from defined benefit schemes – commonly known as final salary schemes – into other personal pension arrangements. That choice begs the question: ‘Just because I can, should I – How can I be certain it this the correct move for me?’.
This is a complex question, because the risk of getting it wrong is significant, with no option to reinstate your Final Salary pension, once a transfer has taken place and the impact on your quality of life in retirement could be even greater! But the answer is much more complicated than the question would suggest, with financial planning outcomes that will be different for every individual.
These are not tranquil waters to navigate even for experts, and unsophisticated advice is easy to find! The proof of that lies with the level of focus that regulators are bringing to bear on this topic. Their view is that, the starting position for financial planning advice regarding Pension Transfer Suitability, is that a transfer from a final salary scheme to a personal pension, is generally not in the member’s best interest.
Where to start?
The first thing is to make sure that your decision is fully informed, and given the risk and complexity of this decision, pension specialist advice is key. Select carefully, and seek advice from a suitably qualified financial adviser, preferably one with Chartered status and (more importantly) advanced qualifications specifically in pension planning.
Second, think long and hard about what it is that you want.
- What does a good retirement look like to you?
- What will your needs be in terms of income, capital, costs to be met?
- What risks are you prepared to take?
- What risks can you AFFORD to take?
- How does retirement look if you do nothing?
- Is security of income in retirement a priority, or do you have alternative sources of income that can be relied upon?
Any adviser committed to providing good client outcomes will need to know all these and many other details before they can advise you. This is because what YOU may perceive as a ‘benefit’ of transferring out of your final salary scheme, does not demonstrate whether the transfer is ‘Suitable’ for you.
They will also need to know the transfer value of your pension. This is information that you can obtain from whoever administers your scheme – ask for a Cash Equivalent Transfer Value (CETV). Please don’t get excited about a high transfer value; a big number does not automatically mean that a transfer is a good idea, but it is easy to be dazzled by a big sum.
What should I expect?
The advice you receive must be highly personalised to your individual circumstances. Pension transfer suitability reports, are designed to not only meet certain high standards set by the UK Regulator (The Financial Conduct Authority) but take into account ALL of your current and future financial planning and retirement objectives – off-the-peg advice just won’t do for a decision as important as this – and should include, as a starting position;
- A Transfer Value Comparator (TVC). This shows the cash sum required at retirement to meet the benefits which would be given up on transfer, based on matching the scheme benefits by purchasing an annuity. With the premise of putting the CETV offered in the context of the guaranteed income being given up
- An investment strategy, suitable for the transfer to proceed. This must take account of all the risks, expected returns and charges associated with the proposed investment.
- The investment portfolio must be assessed as suitable in the context of your personal needs, for future pension income and the timing and pace of any such income.
- An Appropriate Pension Transfer Analysis (APTA) which will include an assessment of your personal circumstances, objectives, needs for income and risk appetite as well as your ability to take on the risk of transfer or not.
- The APTA must also consider whether your personal objectives could be best met by transferring the pension or by alternative means. This must take account of all options available to you and include an assessment of:
- Sustainability of income, using cash flow modelling, based on longevity beyond average life expectation,
- impact of inflation on future income,
- capacity for loss,
- charges to be incurred at outset and ongoing,
- the impact of taxation on net income,
- impact on death benefits and dependant’s pensions, and;
- capability of you to manage a flexible income in the future, including the need for a power of attorney to be appointed and an exit strategy, such as annuity purchase, later on.
- Finally, the drawbacks of transferring out of your Final Salary arrangement should be clearly described i.e. – what you are giving up, which cannot be reinstated once transferred!
So what?
Let’s be clear: greater choices regarding your pension options, means that you have greater flexibility to structure your retirement, to better suit your individual needs, as compared to the status quo. It also means that you may be exchanging certainty in retirement, by way of a secure income, for an uncertain world with a potentially more risky retirement and the possibility of fluctuating income. Therefore, this is a genuinely momentous decision and to be candid a lot of folks have been getting it wrong. So pick your adviser carefully, value specialisation in this area, and make sure that they are robust in their methods and take a seriously personal approach to their analysis and understanding all about you!
