Is the question really that simple?
In our last article here, we promised a series of articles to help people navigate the complexities of pension planning and the legislation surrounding it. This is the first of those, and a good place to start is the hot topic for anyone who has a pension in a defined benefit scheme in the UK or internationally.
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?
Believe it or not, that 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. Some sections of the media have been ‘promoting’ the benefits of transfers, and many savers are jumping in with both feet: since 2013, Google searches on the subject have jumped from 20 a month to over 1,000! But the answer is much more complicated than the question, 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 compensation that has had to be paid out to customers who received unsuitable advice and 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 interests. So if there’s one message we would like you to take from this article, it would be to seek well-qualified and expert advice before you make any decisions – this is not a good area for beginners!
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, expert advice is key. Pick carefully, and seek advice from a suitably qualified financial adviser, preferably one with Chartered status and (more importantly) advanced qualifications specifically in pension planning. And yes: the cost of advice from such a person is likely to be commensurate with both their level of qualification and experience – do not cut corners to save fees in the short term, as long-term consequences could be dire to your financial well-being!
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? For how long? 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 be perceive as a ‘benefit’ of transferring out of your final salary scheme, does not demonstrate whether the transfer is ‘Suitable’ for you. Once all this information has been gathered, only then can an adviser help you to decide whether transferring out of your scheme is a good idea – they need a ‘full’ picture of 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 – and they should send you the paperwork. Again, a good adviser will tell you what you need, and they will be able to analyse what this means in terms of the value of your benefits and the suitability of any transfer, given your unique and personal circumstances. 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 depends on taking 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; the expected investment return required from a Personal Pension to match your existing scheme benefits at retirement, included in that calculation should be the cost of spouse’s pension and indexation of benefits pre and post retirement; numerous cash-flow models should also be included and built around detailed and complete personal information. 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! As mentioned previously what may be regarded as a ‘benefit’ in transferring your Final Salary scheme, does not mean that the transfer is ‘suitable’ for you, especially given your individual and unique current and future financial planning needs and requirements.
So what?
Let’s be clear: greater choices regarding your pension means that you have options that may give you 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 with the possibility of fluctuating income. Therefore, this is a genuinely momentous decision to take about your financial future, and to be candid a lot of folks have been getting it wrong. (In the year to 1st March 2017, the Financial Services Compensation Scheme (FSCS) paid out £105 million to 3,565 consumers, who each received unsuitable advice to transfer away from occupational schemes – both defined benefit and other types of pension schemes.) 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.
