NOTE: The decision to transfer a pension has unique factors to consider for every individual, and you should always seek the advice of an independent financial adviser who is regulated by the FCA to aid you in your decision making.
If you’ve contributed to a pension scheme, then you will have accrued pensionable benefits. In simpler terms, this means you’ll be able to receive an income when you reach retirement age.
When you transfer a pension scheme, you take your benefits (or equivalent benefits) with you, and how much you transfer will depend on your previous pension scheme.
Simply put, you move the benefits you’ve accrued from one pension scheme, to another.
Defined benefit pensions such as Final Salary pensions offer a Guaranteed Income in retirement – one that will start paying out an amount when you retire, and won’t stop until you die.
They are also index-linked to help hold value against inflation.
This means that the total value of a final salary pension can be difficult to determine until its finished because we don’t know how long a person will live for!
Let’s look at a simplified example to help illustrate the point:
If a final salary pension is set to pay out £10,000 every year, and the individual lives for 10 years into retirement, the pension will pay out £100,000 in total.
But if the individual lives 20 years into retirement, the pension will pay £200,000 in total. So how much is the pension worth?
This is where an actuary comes in.
An actuary will look factors about the individual to calculate when they believe a pension scheme member will die, and therefore how much the pension fund will have to pay them.
The actuary is then able to calculate a Cash Equivalent Transfer Value (CETV) using the scheme rules set by the trustees: how much the pensionable benefits are worth if they are transferred away as cash. In some cases, this is less than how much they expect the pension to pay out.
This CETV value can be cashed in and transferred away to a personal pension.
Often referred to as a pension switch rather than a pension transfer, these types of pension move are still best looked at by a financial adviser.
How defined contribution pensions pay out in retirement depends on how much is contributed to the pension and how well those investments perform over time. A common reason people transfer them is to consolidate multiple pension in one place, and/or to make changes to the way the money is invested with a view to generating more money in retirement (despite the fact that most private pensions will charge annual fees that eat into profitable gains).
However, it is still usually wise to receive advice from a regulated adviser in these circumstances, as pitfalls can be everywhere. It is not unheard of for somebody to switch to a pension with high-risk investments without the individual knowing, and later losing thousands.
You should Always receive independent financial adviser from a regulated adviser with the correct advice permissions to advice you. In fact, if you are considering a pension transfer from a Defined Benefit pension scheme valued at over £30,000 then it is a legal requirement to receive advice.
Getting advice is important as pensions and making the right decision can be more complex than it appears on the surface, and a number of factors should be taken into account before coming to a conclusion.
For instance, people are often tempted away from final salary pension schemes after free pension reviews, during which they are told they can generate a bigger pot for retirement if they transfer and make investments.
Pension transfer advice costs vary from adviser to adviser, and may be influenced by the pension the transfer would be from.
For instance, some pension transfer charges are a flat rate, regardless of how much is in the pensions. Others choose to charge a percentage of the transfer amount. Others may continue to charge year on year after the transfer.
All this means that pension transfer advice can cost anything between a few hundred pounds to tens of thousands of pounds.
In some cases, advice may come as part of a free pension review, where charges are only made IF the individual decides to take the advice and make changes to their pension. However, there is an argument to say that advisers and salesmen may be giving biased advice not in the individuals’ best interest in order to secure the transfer and get paid.
Sadly, we can’t be the ones to tell you this. While some people may benefit from a pension transfer or switch, others may be put at unnecessary risk and may be targeted by scammers – it all depends on the exact circumstances surrounding the potential transfer and THAT is why getting advice is often crucial, if not a legal requirement in some cases.
Another benefit of receiving advice from an FCA regulated adviser is that advice is subject to the FCA’s rules.
These rules are in place to make sure advisers perform their due diligence duties and follow the correct procedures that mean the advice they provide is likely to be in your best interests.
Any failings to follow these rules and the adviser may be held accountable by the FCA as part of routine investigations, or because of a claim made against the adviser.
Spencer Churchill Claims Advice are specialists at mis-sold pension claims.