Pension transfers to boost retirement income

If the existing pension does not offer flexible income options and that is a key need for the client then Mr Jenkins says a transfer could be considered.

Also if the existing pension does not allow for inheritability on death and leaving money for loved ones is a key need, then again Mr Jenkins argues a transfer could be considered.

He says: “Offset against this is the need to make sure that the client isn’t giving up extra benefits such as guaranteed income or enhanced tax-free cash in doing so.

“Anyone transferring out of a defined benefit - often called final salary - scheme will need to get advice from a suitably qualified financial adviser, unless their transfer is worth less than £30,000.”

Under new FCA rules currently subject to consultation, all transfers from ‘safeguarded’ benefits to flexible funds above this value need to be advised. For transfers from final salary schemes, this advice must be undertaken or overseen by a qualified pension transfer specialist. W

Assessing the suitability of a transfer can be a complex area, Mr Jenkins points out. It depends on a range of factors such as:

• the age of the customer;

• their state of health;

• the type of pension they are currently in;

• whether their current pension provides guaranteed benefits;

• the financial needs of the customer;

• the need for flexible income in retirement;

• the desire to leave money to the family; and

• the future investment performance of the proposed investment strategy for the new pension.

He says: “Each client should really be assessed individually to ensure that the final retirement solution for them fully meets their needs.”

When it might be right to transfer

Alistair McQueen, head of policy and compliance business protection at Aviva, says another common attraction for transferring pensions is to consolidate various small pensions amassed over a working life, into one pension pot at retirement.

The administrative attraction of managing one pot as against many is understandable, and a bigger pot could, in some circumstances, generate a bigger retirement income, Mr McQueen notes.

Without careful consideration, however, Mr McQueen says it is possible that this administrative and potential financial attraction could be outweighed by the loss of benefits incurred when moving from one pension to another.

He says: “Careful consideration is needed prior to taking action. Once a client transfers, they will have no further rights under their old pension.”

According to Mr McQueen the following steps should be considered:

• A full review of the features and benefits of both the ceding and receiving pension, against the client’s needs.

• Consideration of any benefits that will be lost by transferring from the ceding pension.

• Consideration if any loss of benefits will be outweighed by other benefits in the receiving pension.

• An understanding of any costs associated with transfer.

• An understanding and justification of any differences in charges.

• An understanding of any differences in investment options, between the ceding and receiving pension.

When considering the suitability of a transfer, Billy Burrows, director of Retirement Intelligence, says advisers ultimately must look at appropriateness of new policy, costs - including any surrender or early penalties, and special terms that may be lost.

For someone in ill health, David Trenner, technical director of Glasgow-based IFA Intelligent Pensions, points out most defined benefit schemes will offer an unreduced pension on early retirement, but they will not offer any enhancement once you reach retirement age.

Transferring to buy an impaired life annuity or even to take higher withdrawals under drawdown could be attractive, he notes.

Advice

Under the current rules unless you are a pension transfer specialist, Mr Trenner says you will only be able to assess the suitability of a ‘non-safeguarded benefits’ transfer (what the FCA used to call pension switching).

For ‘safeguarded’ benefits including all defined benefit schemes but also defined contribution schemes with underlying guarantees such as guaranteed minimum pensions, Mr Trenner says you should speak to a pension transfer specialist who will charge a fee for assessing suitability.

As always it is key to remember one option is taking no action.

With the new pension freedoms Rod McKie, head of retirement propositions at Zurich Life, says it is vital that advisers realise there may be no need to transfer out of the existing plan to take a withdrawal to boost retirement income.

He says a key starting point for all customers is to understand what options they have under the arrangements they already own to inform what actions are required to achieve the outcome they desire.

If they do decide to move their pot then Claire Trott, head of technical support at Talbot & Muir, says it is vital that advisers remember – and make sure their clients understand – a transfer is generally an irreversible option.

Advisers with clients contemplating a transfer should also be aware the FCA is currently consulting on changes to the defined benefit transfer advice process. Any adviser getting involved in this area will likely want to track the outcome of this work.