Advising on pension transfers has never been straightforward, and regular changes to FCA rules and guidance do not make things any easier.
But before getting into the complexities of ‘transfer value comparators’ and the like, it is worth making absolutely sure the client has understood the basics of what new options they get when they transfer, and what valuable benefits they are giving up.
To this end, this article simply runs through five good reasons to transfer, and five good reasons to stay put, which it is worth ensuring that any client considering a transfer understands.
Five reasons to stay put
In the spirit of the current regulatory presumption against transfers, let’s start with five good reasons why people might want to leave their defined benefit (DB) rights exactly where they are.
The first reason to stay put is certainty. With the limited exception of your former employer going bust, if you have a DB pension you know how much you are going to get, and you can be certain this pension will be paid until the day you die.
You don’t have to worry about managing your money to make sure it does not run out over an uncertain lifetime – that longevity risk is handled for you by the scheme.
The second valuable feature of your current pension is you are likely to have a measure of protection against inflation, especially if you have built up your pension rights since 1997.
While the detailed rules on the size of your annual increase can be complex, the key point is that each year you can expect your pension to increase to help meet rising household bills.
Many savers will simply fail to grasp the value of this protection, but just asking them how much their council tax has gone up in the past five years will help them to see why a pension that rises each year is a good thing to have, especially over a retirement that can last for decades.
A third plus point of keeping your current pension is that you are insulated against the ups and downs of the stock market.
While some people enjoy choosing investments and are in a position to cope with potential downturns, many people would struggle to cope with a significant fall in their retirement income, and more simply do not want to have to worry about this, particularly as they get older.
A national newspaper recently ran a story about someone who had transferred out of his DB pension but was dismayed when the stock market took a modest dip earlier this year and said he wished he had never transferred. If that is how you feel about relatively small fluctuations in the value of shares, you should think hard before moving out of the guaranteed world of DB.