Pensions  

DB transfers: What to watch out for

DB transfers: What to watch out for

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. 

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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.