Final salary pensions have been big news over the past few months.
The personal finance press has been awash with articles suggesting members should consider transferring their final salary pension. At the same time, unfortunate members of the BHS and Bernard Matthews pension schemes, will be worried about how their retirement is to be affected by recent events.
We regularly advise member of final salary pensions and are becoming increasingly concerned about a potential pitfall we have rarely seen highlighted in the press.
As an aside, for ease, we will use the term ‘final salary pension’ to refer to both defined benefit and final salary pensions in the rest of this article.
Cash Equivalent Transfer Value (CETV)
If you want to understand whether transferring your final salary pension is a sensible option, one of the first steps is to obtain a formal valuation of your pension.
This known as a Cash Equivalent Transfer Value, or CETV for short, and is calculated by the trustees of your pension.
Once provided, the CETV is generally guaranteed for three months; in some cases, this period could be shorter or longer.
If the transfer value is above £30,000, the Pension Freedoms rules mean you have taken financial advice before applying to transfer. These rules are in place to stop people making poor decisions about their pension, leaving them facing financial difficulties in retirement.
CETVs have risen dramatically over the past 12 months. This has fuelled a sharp increase in the number of people transferring away from final salary pensions. In fact, the Financial Times last week described it as a “stampede”.
We are concerned that the trend of rising CETVs may reverse, catching some people out. If you transfer you pension outside of the guaranteed period, usually three months, it is possible that the trustees could recalculate the value. This could work in your favour, but the value could also go down. Remember it isn’t linked to the value of the stock markets as may be the case with other pensions you hold.
Anecdotally, we have spoken to trustees recently who are indeed reducing transfer values.
It is therefore imperative that any decision to transfer, and in many, if not most cases, the best option for members is to remain in the scheme, is taken within the guarantee period.
Any delays could be extremely costly, as of course, could the wrong decision, hence the importance of advice.
Hints and tips to help you hit the deadline
To ensure you take the right course of action, within the guarantee period provided by the trustees, we would suggest you:
#1: Engage a financial adviser before doing anything else. Finding the right adviser isn’t always easy and can be time consuming. It isn’t sensible to use days and weeks of the guarantee period finding an adviser you are happy to engage
#2: Make sure the adviser has the relevant qualifications, and experience, and is actively advising other clients in a similar position to you
#3: Confirm with the adviser that they have the capacity to advise you in a timely way and will be able to deliver their advice, which of course may not be to transfer your pension, within the guarantee period attached to the CETV
#4: Always get the adviser to request the transfer value. There will be other questions they need answers, in addition to finding out the value of your pension. It makes sense to ask these at the same time; we’ve been quoted eight weeks by some trustees to answer even the simplest questions That’s a large proportion of a usual three-month guarantee period wasted waiting for more information
#5: If you have already got your CETV, engage a financial adviser without delay, the clock is ticking.
We are here to help
If you have a final salary pension and would like advice on the best option for you, we are here to help.
Call Sarah or Bev on 0115 933 8433 or email firstname.lastname@example.org