Transfers out of defined benefit pensions continue to hit the headlines – and there’s no doubting the level of interest in this market. The Pensions Regulator recently estimated that 80,000 defined benefit pension transfers were completed in the year ending 31 March 2017.
But this isn’t a move you can make without taking professional advice…
What should you expect if you go down this route? The 10 points below lift the lid on the process involved:
1. Finding a qualified adviser
There are many qualified financial advisers in the UK, but not all have the qualifications needed to advise on defined benefit transfers.
Before you go ahead, check the Money Advice Service’s online directory of authorised financial advisers.
2. Getting legal protection
Seeking advice from a qualified adviser should secure you some legal protection if you come to believe you’ve been misadvised. Acting without advice means you usually act without any legal protection.
3. Fees vs services
As with any valued service, the financial adviser will charge you for their advice.
They’re required to give a clear, comprehensive explanation of their fees in advance, without cost or obligation.
It would usually make sense to shop around to see how fees and services between advisers differ.
Personal recommendations can often influence your selection of an adviser, but the choice is yours and the fee is only one element of that selection.
4. Guilty until proven innocent
Given the value of the benefits and income certainty provided by defined benefit pensions, the Regulator’s official guidance is that anyone advising on these transfers should start by assuming that the transfer is not suitable!
5. Taking a close look first
Before considering a potential new home for your pension savings, your adviser should first fully understand the defined benefit pension that you’re considering leaving. Most transfers are irreversible and your current defined benefit pension will carry its own benefit structures that need to be understood. Defined benefit pensions can vary greatly, so never make assumptions.
6. Your tax affairs
A common reason for considering a defined benefit pension transfer is to defer income and potentially reduce your income tax bill. But tax affairs can be complicated – especially where pensions are involved…
Your adviser should consider more than income tax. They’ll also need to consider the potential impact on inheritance tax and your pension lifetime allowance.
7. Your attitude to risk
A defined benefit pension transfer will transfer investment and longevity risks from the employer (or scheme sponsor) to you as an individual. In short, by transferring you are giving up a retirement income guarantee that is traditionally part of a defined benefit pension. Risk itself is not necessarily a bad thing, but you and your adviser will want to consider how much risk you are willing to take.
8. Your retirement income needs: All pensions, of all types, are primarily designed to provide an income in retirement. It therefore follows that the adviser will want to examine your expected income needs in retirement as part of the advice process. If your expected income needs are easily covered by other sources – such as other pensions – then this could ease the importance of the defined benefit pension under examination.
9. Your critical yield: This piece of jargon will likely arise in the act of seeking financial advice. The “critical yield” is the investment rate of return that you would have to achieve in an alternative pension (normally a defined contribution pension) to replicate the benefits being offered by the defined benefit pension you are considering leaving. A high “critical yield” increases the risk that transferring out of the defined benefits pensions may not be in your best interests. The adviser will calculate your specific “critical yield” and use it to inform their final recommendation.
10. A demonstration of independence: For some, the regulatory requirement to take advice may be seen as a frustrating inconvenience. Some may say, “It’s my money, so I should be able to do with it as I please”. Regardless, in all cases, the adviser will be required to communicate to you, and demonstrate to the regulator, that there has been clear and comprehensive consideration of all relevant factors prior to giving advice.
80,000 people have been through this process in the past year and have chosen to proceed with their transfer. The process is not designed to represent a barrier. It is instead designed to ensure your best interests are served in what is a complicated area of financial planning. For some, your defined benefit pension savings may have been amassed over twenty years or more, so it makes sense to take time before making a decision that could shape the rest of your life.
 FCA COBS 19.1.6 - https://www.handbook.fca.org.uk/handbook/COBS/19/1.html