Final Salary Pensions Transfers
Final salary transfers could be incredibly beneficial to people who are looking to move their pensions from their existing scheme into something that better suits their future needs.
Reading this guide will give you the tools to make the right decision for you and your family’s future.
Final Salary Transfers Introduction
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.
You can learn more about Self Invested Pension Plans here
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:
Provide Relevant Regulation and Protection
Be Independent
Employ Adequately Qualified Advisors
Offer a Fee Based Service
Be 100% Transparent
Have a Good Reputation
Defined benefits transfer under the microscope
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.
Final Salary Transfers Explained
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:
- The level of your current pension income entitlements
- The schemes rules on how your pension increases
- Your life expectancy
- Current UK Gilt yields & annuity rates
- How many years away from the normal retirement date.
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.
Who Do They Apply to?
- ‘Deferred members’ of pension schemes i.e. those that have left the employer whom sponsored the scheme and are yet to draw on their benefits
- In some more rare cases existing members of schemes can become deferred whilst still with the same employer. This is when the employer has closed the scheme to new and existing members and provided a new style defined contribution scheme.
Reasons to Explore your Final Salary Transfers Options
- A final salary pension can be a significant financial asset. In many cases for people in their 50’s or above whom worked for blue chip companies the majority of their wealth is in these types of arrangements. A transfer would give you control of this asset and choice on how it can be passed to future generations free of inheritance tax
- Transferring your benefits would also give you control of when and how much you draw out of you pension. Ignoring long term care needs for a second, I have never seen a 90-year-old spending more than someone in their 60’s. Having the option to spend more in earlier years or at least having the option to may be preferable, especially for all that travel
What Is My Transfer Value Likely To Be?
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.
High Transfer Value Implications
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.
Why you Might Stay in your Final Salary Pension Scheme?
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:
- You have a low appetite for risk and prefer the certainty of the guaranteed income
- You have a longer than average life expectancy. Although not always the case but if your parent and any siblings lived or are living a long and healthy life you may do the same, therefore get more of the income from your current scheme
- You have very little experience with investments. Although this can be minimized by taking advice and using professional investment managers it’s still a factor that should be considered
- The final salary pension scheme is your main or only income and you have zero tolerance to fluctuations or even the money running out
- You are just attracted to the guarantees which come with zero effort.
Why you Might Take your Transfer Offer?
- In the current economic climate, your transfer value extremely generous and you are confident with a very cautious approach to growth you will be able withdraw more benefits from a personal pension during your life time
- To take your pension commencement lump sum but not your pension income so you can semi retire or use the money for something whilst you are still working
- To reduce your tax liability with the drawdown options of a personal pension i.e. deferral or retiring outside the UK by using a QROPS
- To buy an annuity with a certain level of income to meet expenditure and have the rest in a flexible pot which you can do with some personal pensions (SIPPS & QROPS)
- The flexible income would provide a higher standard of living and more available cash in your more active earlier years
- You have a higher that average attitude to risk and prefer the additional risk of a personal pension
- To take a higher pension commencement lump sum to invest elsewhere, buy a new or holiday home or to renovate your existing home
- Transferring to a personal pension would be an effective IHT planning tool for your circumstances whilst keeping the 100% flexibility of a pension
- The option to leave some or all of the pension wealth to your spouse or next generation
Step By Step Guide To Successful Final Salary Transfers Process
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.
1.Make an inquiry with a reputable financial advisory firm in your region or use one of Expat Wealth Advisers recommended firms.
2. 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
3.Check he/ she is qualified to at least UK diaploma 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!
4.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
5.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
6.Upon receipt of the information you and your advisor should be able to run through all scenarios and explore all options.
Use the below checklist to make sure you know what should be covered in the advice process
- A full explanation of your current pension benefits and how they could be used to meet your needs
- A summary of the key risks associated with any transfer and also remaining I the scheme
- An assessment of whether you need to apply for life time allowance protection or if the transfer would affect any protection you already have
- A recommendation for the most suitable and cost-efficient personal pension that would meet your requirements
- An assessment of whether you need to apply for life time allowance protection or if the transfer would affect any protection you already have
- A full explanation of all available options including tax treatment
- A personalized assessment of the critical investment return needed to provide higher benefits than your current scheme should you buy an annuity upon retirement
- The adviser should give an opinion on what they think the best course of action would be given your specific circumstances and objectives
- A recommendation for a suitable investment strategy that would match your risk profile and drawdown requirements.
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.
What to Watch out for!
Excessive Fees
There are several fees associated with setting up a personal pension. Every firm will have different fees and their recommended trustee, platforms and investment managers will also with different fees.
I have listed below the what fees can expect to pay when transferring a pension. If they are any higher than the below, ask extra questions. It’s very common in the offshore market for their firms to look for extra ways to get paid.
Excluding you and your current final salary trustee. The parties involved in transferring a final salary scheme into your new personal pension are:
- Financial Advisory firm and advisor
- UK pension transfer specialist company
- SIPP / QROP Trustee
- Investment Platform
- Investment Manager / Portfolio manager
Follow the guidelines below so you are well informed for any dealings with advisory firms:
Initial Advice Fee
This is the fee that the advisory firm charges for their advice process and for facilitating the transfer. It ranges from 1% to 7% (I have even seen 8%) and is mostly paid from your pension directly to the advisory firm.
There are 2 options in the way to pay your financial advisory firm and that’s via commission or an upfront fee. Generally, its commission in the less regulated markets and an upfront fee in the more regulated markets and generally comes from your pension although that’s not mandatory.
- The commission way will mean 100% of your pension is invested on day one and you’ll have exit penalties should you exit the investment platform. This can be a powerful way to set up your pension if the fee is reasonable but if the fee is high it will drag on performance. As a general rule, if your platform fee is 1% per annum for 10 years i.e. 10%, the advisory firm is being paid 7% upfront.
- The fee way usually involves an ordinary investment platform where the fee is taken at the start. It usually ranges from anywhere between 2% & 5% depending on the size of the pension and the recommending company. This is the only way advisors can charge in the UK as its transparent and comes with no exit penalties.
Either way ask for full transparency and there’s nothing wrong with asking how much the adviser gets paid. My advice is you shouldn’t be paying any more than 5% whether its upfront or in the form of commission.
The truth is you can literally design your own charging structure within a personal pension. My advice is to compare both ways.
Be wary of anyone that says ‘don’t worry about fee’s, we get paid by the product provider as this is far from transparent. Who do you think pays the product provider… that’s right, you!
Investment Platform Fees
The platforms that have the option to pay commission to the adviser as mentioned above typically have admin fees which continue for the life of the platform. These are typically, around 400 GBP per annum but as a percentage of a £100,000 transfer its 0.4% in addition to the amount they collect from you for indemnifying the commission to the advisory firm, assuming commission was paid.
The ordinary platforms have an annual management charge of between 0.3% and 0.4% which runs for the life of the platform and is based on the value of the pension.
Ongoing Advice Fee
This usually ranges from 0.5% to 1% depending on the size of the pension and will fluctuate with the new pension fund. Sometimes the underlying investment strategy pay the ongoing fee to the advisory firm.
Don’t be fooled, if a fund pays 0.5% back to the advisory firm that fund is exactly 0.5% more expensive than the ‘clean’ version of that exact same fund.
Again, you want absolute transparency here and ideally you agree a service fee which is then paid via the platform and not from the underlying investment strategy.
Trustee Fees
Both set up and ongoing fees are paid to your new trustee until you drawdown. SIPP set up fees are usually around £300 and annual admin fees of £500, this means upfront you have £800. QROPS are usually around double. Please note some trustees have ‘light schemes’ for smaller amounts.
Portfolio Manager Fees
Some advisory firms will choose to use a portfolio manager to run their client portfolios. This can be highly beneficial and lower risk for the company however (more below) external ones are usually by far the best and annual management charges range from 0.3% – 0.5%.
Underlying investment / fund manager fees: This all depends on the strategy and can range from almost negligible to around 0.7%. A portfolio manager selecting stocks pays very little for that but a portfolio manager selecting a range of external funds
My advice is to plot ALL fees on a excel file converted into a percentage of your pension value. Be mindful that if this gets to above 3% you will struggle to achieve any real growth after inflation unless you’re an aggressive investor.
Past Performance of Proposed Funds
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.
Internal Funds
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.
Summary
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:
- Any advisory firm is regulated
- The advisor they select for you is qualified to UK level 4 minimum and has testimonials
- You are not rushed into a decision
- You are thorough and consider all possible future scenarios
- You are offered to pay via a fee and not just commission
- You get clarity of ALL fees and do your excel file
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.
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