Impact of getting pension consolidation wrong

For instance, if a pension contract was accrued with a different funding regime pursuant to old pension rules that facilitated a tax-free lump sum greater than 25 per cent of the pot value at retirement, then Adrian Mee, consultant at Mattioli Woods, points out this may be lost upon transfer.

Accordingly, he says more of the pension fund would then be commuted to be paid out, less income tax.

At the same time, if losing a final salary pension scheme is elected and the new pension scheme does not perform to a set criteria, Mr Mee warns the guaranteed pension income left behind may be greater than the retirement income provided by the new contract. This would mean the client can end up with less income in retirement, he warns.

Changing a pension contract may also restrict the investment options open to the capital.

Transfer may also alter the benefits available on death to the member’s beneficiaries.

Mr Mee says: “All of the above points need to be fully addressed prior to any transfer being undertaken by the member.

“Indeed, commonly there will be an initial charge made by any transfer being conducted by a pension transfer specialist, which should also be put in context of the transferring amount to ensure that in the long-term the pension saver is better off after the transfer.”

If you get a DC to DC pension transfer wrong, David Brooks, technical director at Broadstone, says your client may experience poor performance, which will reduce the fund value.

But he says if your client is unhappy with their pension fund they should switch again and find one which performs better.

Mr Brooks says: “People shouldn’t feel bound to one provider or another. As in all walks of life, if you are not getting the service you want, move on to someone else.”

If you make an error on DB to DC transfers, then Mr Brooks warns your clients face penury, poverty and state hand-outs.

He says: “Getting a DB to DC transfer wrong could significantly alter your [client’s] quality of life in retirement.

“The risk switch from DB to DC is nearly 100 per cent. With DB the risk is borne by the employer, they need to make sure the money is there.

“There is a risk for the member that the employer fails and a poor funding position will result in the loss of some of the pension but this is not the norm. However, in DC the risks are borne completely by the individual.

“No-one is making you a promise so there is no guarantee and investment markets could work against you and you lose a significant proportion of your pot, or live too long and spend it too quickly and run out of money.”

He says: “Of course the ramifications need not be cataclysmic. A larger fund may perform better in a lower charged environment, the default strategy maintains the risk/return you desire and you have better retirement as the retirement process of understanding your options is much easier with the form filling, etc, done during the consolidation phase and not when access to the money is the driving influence.

“Consolidation in preparation for retirement is an example of sound planning.”

David Trenner, technical director of Intelligent Pensions, says if you recommend a transfer you need to make sure that you have provided a detailed ‘reasons why’ letter and fully explained any features you recommend the client gives up.

Mr Trenner warns losses on claims made about pension consolidation to the Financial Ombudsman Service can be substantial and even if your professional indemnity insurer pays up your premium next year will reflect this.