Since the 1980’s it’s been possible to transfer your pension savings, but since the introduction ‘pension freedom’ from defined contribution schemes in 2015, transferring benefits has increased in popularity.
In this guide we will explain exactly what final salary transfers are, things you should consider and why now is a great time to review your options.
It’s important to point out that there are a huge number of DB schemes in the UK that although all operate in roughly the same way, can also be quite different. This guide refers to the general way final salary pension schemes work.
Moving out of a final salary scheme and therefore giving up the guarantees is a decision that should be given some careful thought. To achieve the right outcome, we highly recommend taking advice from any regulated firm with an in-house pension transfer specialist.
Expert Wealth Advisor works closely with a small number of regulated and experienced advisory firms across the globe whom we feel are offering the most comprehensive and unbiased pension reviews.
We are very strict with the criteria that needs to be fulfilled to get on our panel of recommended firms which you’ll find listed below. The firm must:
To say DB pension transfers is under the microscope is an understatement. The landscape is constantly evolving and regular changes are brought in by the UK regulators and government to protect clients and create the best outcomes.
Reading this guide will give you the tools to make the right decision for you and your family’s future.
In simple terms a pension transfer basically means moving the cash equivalent transfer value (CETV) from your final salary pension scheme to a defined contribution pension scheme, usually a Self – Invested Personal Pension (SIPP) or Qualifying Recognised Overseas Pension Scheme (QROPS).
You can ask your employer for a CETV (cash equivalent transfer value) anytime which they will usually take around one month to calculate. Most schemes offer one free calculation per twelve-month period, after which there’s a small fee.
This value is effectively the ‘cash equivalent’ amount that the scheme has set aside for you to meet your specific needs as they fall due. In essence this is the amount that would need to buy an annuity to the provide your guaranteed income. Hence the lower annuity rates the more the scheme has to set aside.
The actuaries calculate the CETV using the following guidelines:
Once you accept the transfer value you will be discharged from the final salary pension scheme as you have effectively been ‘paid off’ and the transaction is irreversible. Now the amount of income from withdrawals you receive depends entirely on the new pension funds’ performance, hence this needs careful consideration.
With a defined benefit scheme, the member has zero risk and the risk is on the company providing the scheme whereas with a personal pension the member bears all the risk.
If the transfer of benefits is over £30,000 you have to take advice from a UK regulated pension transfer specialist with the relevant permissions, qualifications and insurance and in most cases, this is a separate firm to your financial advisors.
A general rule is that the closer you are to retirement the higher the transfer value will be. The average CETV in the UK currently is 23 times todays pension income. If you look at your annual statement and multiply by 23, you’ll get a good idea but make sure your statement shows todays pension income and not your income at your date of leaving (DOL). If it is at DOL ask your scheme to send you the calculation revalued to today and they will.
The multiple typically ranges from 18 to 30 with the only caveat being that the scheme can reduce the offered value of the scheme is badly underfunded and the employer doesn’t have the means to make up the deficit.
A higher than expected transfer value may allow early retirement as you’d have access to more money than you budgeted for.
The higher the transfer value the more cautiously you can invest the wealth in a personal pension to receive equivalent or higher benefits along with the additional flexibility. After all, 1–2% above inflation is much easier to achieve than 4-5% above.
I have actually seen a few transfer values where the clients could simply hold cash for the final 5 – 10 years prior to their normal retirement date and then buy an annuity at retirement and still receive a higher income than from their scheme.
A high transfer value can also mean a much higher PCLS (pension commencement lump sum), also known as tax free cash that from the final salary pension scheme. This is emphasized when looking at early retirement options which leads to planning opportunities for say early or semi-retirement.
Transferring out of final salary pension schemes is not for everyone and should be seriously considered ideally with an expert. Even though transfers are becoming more and more popular, the certainty the guaranteed income from a DB scheme provides should not be given up lightly.
The lifetime income from a DB scheme is a great benefit to hold and staying in the scheme may also be the best option if:
These are some of the reasons you might decide to give up your guaranteed benefits and take on the additional risk of a personal pension:
Reviewing and transferring your final salary pension is a complicated process which is best done with regulated financial planning company:
After following the below process, you will be able to make a well-informed decision on the best course of action for you.
Make an inquiry with a reputable financial advisory firm in your region or use one of Expat Wealth Advisers recommended firms.
If you decide to self-select, make sure they are regulated and do your research, bigger is not always better, search the internet for client testimonials. Make sure their reputation is good and not only on the first page the googles search and arrange to meet with the advisor that is assigned to you.
Check he/ she is qualified to at least UK diploma level 4 (minimum standard UK). Qualifications are not necessary in certain regions so don’t assume anything. A good advisor should have more than 5 recommendations on LinkedIn and not just from ex colleagues!
Go through their full factfinding process including risk profile which will allow them to build an accurate picture of your current position and ambitions for the future along with a risk profiling tool. Be forthcoming with information here as it will help ascertain the suitability of your schemes
They or you can then write off to your pension providers and request all the relevant information regarding your current schemes. This should include your yearly pension income revalued to the present value and cash equivalent transfer value
Upon receipt of the information you and your advisor should be able to run through all scenarios and explore all options.
Involve your spouse in the decision and even though there are deadlines, do not be rushed. Make sure your advisor lays out a time line on when decisions need to be made to makes sure you don’t let the transfer value run out as they are only valid for 3 months.
Still one of the most common statements in financial services and its true. I urge you to delve a little deeper. Yes’ if a portfolio management company consistently out performs their peer group and benchmarks there’s a good chance they will continue to do so but is there anything else at play here.
The best example I can give is where an investment fund is denominated in GBP but mainly holds US companies denominated in US Dollars. At the moment these look fantastic however most of the out performance is due the weakening of GBP against the USD.
Very common with firms trying to increase their ongoing revenue is for them to bring the management of client money is to do it in house. This means you still pay the same but the firm gets to keep more and you have far less expertise however I have seen internal funds running at over 3% with awful performance to match.
There are some great financial advisory firms outside the UK but also, the exact opposite. A few last words of wisdom would be to make sure:
As always Expat Wealth Adviser is here to help, feel free to reach out for anything from an initial conversation to a full analysis of a proposal for a transfer of your pension to a personal pension.