“To Transfer… or not to Transfer, that is the question” – Shedding Light on The Final Salary Pension Conundrum
Transferring out of a Final Salary scheme is unlikely to be in the best interests of most people.
Back in the 80s, my Mother who is a retired Doctor, naively agreed, without properly understanding and under duress, to have her NHS Final Salary Pension transferred to a non-final salary pension by a Financial Adviser, she was in her 40s at the time. Today this would have been deemed unsuitable at the onset because she was in her 40s, i.e. not of retirement age and she was continuing to actively work in the NHS. She complained and thankfully the Ombudsman reversed transfer and I am happy to say that she is now a comfortable final salary pensioner!
Back in those days, when Margaret Thatcher was PM, Financial Advisers were in the most salespeople and weren’t regulated the way Advisers are today. It wouldn’t be remiss to say that the industry back then was a bit ‘wild west’ and unfortunately, the industry carries this baggage with it to this day.
Roll forward to 2019, post the 2013 Retail Distribution Review, when minimum standards for advisers were brought in, and the financial advisory industry is a very different place. However, we still hear of scandals and specifically Final Salary Pension scandals. For example, most recently the British Steel debacle, where it was reported that, ‘ambulance chasing’ introducers and people purporting to be advisers were waiting outside British Steel coercing unsuspecting British Steel Employees to transfer their enhanced pensions to iffy schemes and charging ludicrous sums for their services. We all also hear of scandals where people lose their pensions from fraud.
Sadly, there will always be this type of unscrupulous activity in this industry, but I am glad to say it is but a fraction of what it used to be. On the contrary, now the industry is probably overly regulated, but rather that than under-regulated and the bad old days.
Here are some things to consider if you are thinking about transferring your pension:
Do you have other resources for retirement?
This is important because if the advice is indeed to transfer away your final salary pension to a non-final salary pension, you will be exposing your pension to market risk, credit risk, currency risk, etc. IF there is a market correction then you may need to hold off from drawing down on your pension until the market recovers, by way of drawing down on other assets.
Do you need to drawdown on the pension or is it a financial legacy for children?
If you have a large defined benefit (final salary) pension and you have decided that you want to pass this onto loved ones on death, then it could be that a transfer is appropriate. However, if you are planning to drawdown on the pension too then careful management of the pension will be required. You will likely also need to consider estate planning, tax and other financial planning to ensure your wishes are met.
What is your tolerance to ongoing fees?
Transferring a pension away from a final salary wrapper is complex and requires skilled professional advice. This means fees! If you aren’t comfortable with paying fees and having your pension serviced on an ongoing basis, transferring your pension away from that wrapper may not be suitable for you.
Has the value been enhanced and why?
Has your pension CETV been enhanced? We have seen some whopping increases in pension values over the last few years. This is primarily because companies do not want to keep these long-term liabilities in their balance sheets so they will incentivize you to leave the scheme. The people that don’t leave the scheme and stay in a scheme may then be in a good position. This is certainly something to consider.
Are you in good health?
If you transfer your pension in ill health and then subsequently die within two years of the transfer the pension may be subject to IHT irrespective of whether you die pre or post 75 yoa.
Do you have other assets?
If you do not have other material assets in your estate, transferring your pension away from its DB wrapper may not be suitable for you.
Is the pension scheme funded, partially funded or unfunded?
When analysing whether to transfer your pension or not, your adviser will look at whether the scheme is fully funded, partially funded or even unfunded. There is a myth that all final salary pensions are better than non-final salary pensions. Clearly this is not the case, if a scheme is unfunded for example. In this example, how would the scheme then meet its long-term liabilities.
What is your Attitude to Transfer Risk?
For example, how do you feel about not having a set annual income? What will you do if the pension doesn’t last you for life? What is your experience of investing?
What is your Capacity for Loss?
What happens if the markets crash? Do you have enough assets and other resources to weather the storm?
What is your Attitude to Risk?
What kind of an investor are you? If you are risk averse for example, transferring a pension away from its final salary wrapper may not be for you.
Have you considered alternatives?
If you are transferring a pension to pass onto children or loved ones on death, have you considered taking out a whole of life policy instead? Ask your adviser what alternatives there are to transferring away, especially if you are in a good scheme.
If you are thinking about seeking advice regarding your final salary pension choose your adviser carefully… here’s a few things you might want to check with the adviser and on the FCA register:
- Does the adviser have the relevant Final Salary qualifications?
- Is the adviser Chartered? (this means they will need to adhere to strict codes of conduct).
- Is the adviser/firm accessible and local?
- Do the charges for the work seem reasonable?
- Is the adviser a Pension and Investment specialist with appropriate industry experience?
- Have other people had a good experience using the advisers service? Check online reviews and, if necessary, ask to speak to similar clients.