Transferring a Defined Benefit of Final Salary pension is a onetime decision, there is no going back; once transferred you have given up a guaranteed lifetime income and the security that comes with it. There has been a lot of negative press around the subject and the FCA have taken notice, repeatedly voicing concerns.
To keep things simple, throughout this article we’ll only refer to Defined Benefit or Final Salary pensions as Defined Benefit.
Between 1st April 2017 and 31st March 2018 The Pensions Regulator recorded 72,700 people transferring approximately £14.3 billion out of Defined Benefit pensions. That’s an average of almost £200,000 per person; a significant sum, accessible because of Pension Freedoms.
If you have a Defined Benefit pension and a potentially high transfer value burning a hole in your pocket, here are twelve things you must consider; the Defined Benefit dirty dozen:
1. Don’t think short term.
It might feel like a lottery win at 55 if you receive an inflated transfer value but remember what you will be giving up (a guaranteed pension for the rest of your life, and potentially for you partner when you die). That money may need to provide you with an income for life.
2. Your friend (probably) isn’t a financial adviser!
Your mate down the pub might have transferred his pension and is recounting the immediate rewards, but what’s right for them may not be right for you. Individual circumstances and the suitability of transferring will vary wildly from person to person.
3. Don’t decide before seeking advice.
If your transfer value is above £30,000 by law, you must get financial advice. Do not expect your adviser to simply sign off a transfer because you want it, they are professionals working in your best interest. Have an open mind and properly consider their recommendation.
4. Be prepared to pay for advice.
You will be engaging someone who has invested a significant amount of time, money and effort in their qualifications and continued regulation. Transferring a DEFINED BENEFIT pension is a big decision, certainly not one to be taken lightly.
5. Cheapest isn’t best.
When finding an adviser, the cheapest and the best value for money are very different things. This is a specialised pension planning area; the research behind a recommendation is very complex. You need an adviser with more than the appropriate qualification, ideally, they will be Chartered, Independent and specialists in the field.
6. Talk to an adviser first.
If possible, talk to your adviser before getting a transfer value from the Scheme Trustees. Transfer values have a limited lifespan and are only guaranteed for three months. If it expires you will either have to wait 12 months or pay the Trustees to calculate another.
7. You’re not in a rush.
The transfer value may have a three-month expiration, but if managed properly that’s plenty of time to make an informed decision. Remember, once transferred there is no going back.
8. Pensions are designed for retirement.
We are living longer; you have to think long-term, the average life expectancy in the UK is just under 82 years old. Withdrawing your Defined Benefit scheme at 55 is not a decision to take lightly.
9. Avoid contingent charging.
Contingent charging means the adviser only gets paid if you go ahead with their advice. This can cause a serious conflict of interest and is a key driver for poor advice. So much so, the FCA are considering banning it altogether. Find an adviser with fair and transparent fees, preferably fixed.
10. Ignore sensationalist headlines!
“Why now is the time to cash in your final salary pension” is a headline in The Telegraph from December 2016. Headlines are designed to sell papers and attract traffic online. There may be quotes from ‘experts’, but there is no blanket recommendation for everyone.
11. Google isn’t always right.
The internet is an incredible resource of information, advice and recommendations, but remember it is unregulated. Find a trusted site for recommendations and look for social proof of a firm’s reputation.
12. Financial scams.
Where there are large sums of money involved there are inevitably vultures circling. There are unscrupulous introducers and advisers, so do your research and get a recommendation from someone trusted. Under no circumstance engage anyone who has cold called you and take firms with Google adverts specially targeting your scheme with a very large pinch of salt.
There you have it; the Defined Pension dirty dozen. If you have a Defined Benefit or Financial Salary pension and are considering transferring it, get in touch with a firm who is Chartered, Independent and specialists on 01454 416 653.