Following the introduction of pension freedoms, additional protections were put in place to make sure those moving from the regime of defined benefits (DB) to defined contributions (DC), or giving up safeguarded benefits to access the freedoms, only do so with advice.
That advice needs to be from a qualified and regulated adviser. There are exceptions for cases where the benefits are worth less than £30,000 because the cost of this advice versus the possible detriment to the member would seem to be disproportionate.
Given the nature of DB schemes, this arbitrary level is likely to mean that people require most advice. However, those who have safeguarded benefits such as guaranteed annuity rates might have significantly smaller pots, so they might be able to sidestep the issue.
Why take advice?
Many people want to avoid taking advice or shortcut the process by getting a simple sign-off from an adviser. This isn’t possible and anyone promising this won’t have the client’s best interests at heart. Full advice is needed because these transfers and their implications are complex and there is no going back. This is one of the most significant issues.
Should the member change their mind after the transfer, they have the right to cool off from the new scheme. But the ceding scheme doesn’t have to take the benefits back, so the member could end up in limbo. This is a good reason to take the time and effort to go through the proper process and read all the documentation before committing to anything.
It’s not just about the figures
The thing some people forget when looking at pensions and other financial products is that we are all different and we all view things differently as we get older. This is why there is no one answer to the issues of pension transfers: you could be the same age, gender, and in the same scheme with the same dependents, but your view on life and finances could be so different that the advice for one person would be to transfer and the other not.
Full fact-finds are required when considering the best options. Leaving something out that may seem irrelevant at the time will only lead to a less than accurate recommendation.
One of the most important areas a pension transfer adviser will look at will be personal circumstances, taking into account all current and future family commitments.
The attitude to risk or more importantly the capacity for loss will be built on this. It is no good feeling that you can take all the risk in the world as an adventurous person if, should the worst happen, you are unable to cope with it and your family would be out on the street.
Of course the benefits the current scheme offers are important when reviewing a possible transfer, and they need to be compared to the benefits that are needed in retirement. The guarantees that this type of scheme provides may be the most important thing, but if flexibility of income and retirement age are more important that may well sway the argument the other way.
It isn’t likely to be a clear-cut decision one way or the other as both things can be very appealing. In addition, what is important at one point in time may not be so important later in life or vice versa.
Rationale
One of the main reasons given for transfers out of DB schemes is the availability of wider options upon death. In most cases the DB scheme will pay a spouse or civil partner a taxable pension on the death of the member, however old they are when they die.
But in a DC scheme there will usually be greater options available. First, it is generally possible to choose anyone as a beneficiary rather than just a spouse or civil partner. In addition, should the member die before age 75, the benefits should be paid free from tax. If death occurs after the age of 75 they will be taxed at the beneficiaries’ marginal rate of income tax.
What’s more, in a DC scheme, it is possible for the funds to remain in a pension for generations to come if they are not used by the beneficiary or cashed in for a lump sum in the meantime. It is also possible to leave the decision to trusted persons after the death of the member by using an appropriate trust; this will also add some complexity, which is where advisers can show their worth. As with all of these things, it cannot be considered in isolation, it must be balanced with all other wants and needs.
In a DB scheme the investment risk and decisions all fall on the trustees of the scheme. But should the benefits be moved to a DC scheme, the investment risk and decisions will fall on the member and their adviser, should they have one. Investments will need to be considered carefully at the point when a transfer is advised, and should form part of the recommendation.
It isn’t possible to advise someone to transfer into cash alone because this is very unlikely to result in a good retirement outcome.
In addition, it should be remembered that ongoing investment decisions would need to be made right up until death or the point at which an annuity is purchased. This involves engagement with retirement planning, which can’t be ignored.
Insistent clients
Even if full advice is sought and given it doesn’t mean that the advice will be to transfer out – it could be to remain within the scheme. The outcome of the advice isn’t actually the concern of the DB scheme; the issue is to ensure that advice has been taken.
Problems may come with finding a scheme to receive a transfer if the member still wants to transfer their fund.
Since the introduction of the new rules around advice and this type of transfer, additional restrictions have been placed on those transferring in order to access their benefits immediately.
Previously, this didn’t require the same level of advice. But it has now been recognised that those moving from a regime where they have a guaranteed income for life to a regime where at any point they can just strip the fund out (subject to income tax) still need advice.
This was not such an issue before because there was not the option to simply cash in the fund, so it is important to continue to look closely at what is being given up for that flexibility, as well as the impact it may have on later life. After all, we are all living that much longer these days.
The transfer of any pension should not be taken lightly, especially where there are guarantees at stake.
The issue with pensions that have been built up over the years is that legislation has changed and the decision is rarely as clear-cut as it may seem at outset.
Taking advice can be a crucial part of asking the right questions to get the best outcome at retirement. In most cases clients will subsequently realise that it is money well spent.
Claire Trott is head of pensions strategy at Technical Connection
