Pension Freedom has opened up many more possibilities for people as they approach retirement, including the option to transfer out of their Final Salary pension.
Before we go any further we should point out that Defined Benefit pensions are also referred to as Final Salary schemes or maybe CARE (Career Average Revalued Earnings) schemes, however, for the sake of simplicity we shall only refer to them as Defined Benefit pensions in this article.
It’s probably still true to say that, for those people who have them, Defined Benefit pensions are still the ‘gold standard’ of retirement planning. They provide a guaranteed income for the rest of your life and often continue to pay out after your death to your spouse. Furthermore, the income generally rises each year, to help combat the effects of inflation.
For these reasons transferring out of a Defined Benefit pension was almost always considered to be a bad option, which would leave you worse off in retirement. Whilst that may well still be true, following the introduction of Pension Freedom, more people than ever are considering the option of transferring their Defined Benefit pension.
If you are one of them, what factors should you be considering?
#1: Take professional advice
Unless you have a very small Defined Benefit pension you will not be able to transfer your pot unless you have taken advice.
We would always recommend you use an Independent Financial Adviser, who has the appropriate qualifications, known as G60 or AF3 and is experienced with this type of work.
The adviser’s job is to assess your circumstances and then recommend whether or not it is in your best interests to transfer the pension. Be prepared to pay a fee for this advice and also remember that your adviser may recommend you don’t proceed with the transfer.
If this is the case listen carefully to their advice. You may wish to proceed with the transfer, but there is a reason why they have recommended you don’t; it isn’t the right option for you.
#2: Avoid cold callers
Over the past few years we have seen countless people give up valuable benefits in Defined Benefit pensions to transfer into a Self-Invested Personal Pension (SIPP) or Small Self-Administered Scheme SSAS) and invest the proceeds of their transfer into risky, unregulated investments after being tempted by promises of high, guaranteed returns.
No one knows the exact percentage, but many of these schemes have gone horribly wrong, with the investor losing all of their pension pot and consequently suffering a poorer retirement.
Most scams of this nature start with a cold call and proceed, via the offer of a “free pension review” to recommending you transfer your pension.
Our advice is simple, never buy anything following a cold call, if something sounds too good to be true, then it probably is and follow tip #1: Take professional advice.
#3: Understand the guarantees you are giving up
A Defined Benefit pension provides a guaranteed income for the rest of your life, and often that of your spouse and dependents too.
Even if the worst happens and the employer linked to the pension becomes insolvent and the scheme has more liabilities than assets (BHS was the latest example of this) the Pension Protection Fund will step in.
Most people will experience a drop in income when they retire, can you therefore afford to give up the guarantees offered to you by your Defined Benefit pension? The lure of trying to get a higher income than is available from the Defined Benefit pension can be tempting, but to do so generally requires a significant rate of investment return, which of course means taking more risk with your pension pot.
Are you really prepared to consider doing that?
#4: Look to the future
If you are married, have a civil partner or other dependents, the decision to transfer out won’t affect just you. If you die before they do they will have to live with the consequences of your decision.
Again, take advice and ensure the needs of everyone are taken into account before you decide to transfer.
#5: More options when you retire
Transferring away from a Defined Benefit scheme is almost always the wrong thing to do prior to retirement; there are possible exceptions, although these are rare.
However, when you get to retirement, the new Pension Freedom rules mean that there are more occasions when a transfer may be suitable advice. For example:
- The options available on death may be better following a transfer
- Pensioners who are single in retirement may get a higher income from an alternative option, such as an Annuity, especially if they have health problems or have smoked
- Some wealthier pensioners may prefer the increased flexibility available following a transfer, compared to the relative rigidity of the existing Defined Benefit scheme
However, the leap out of a Defined Benefit pension is a big one, especially if it involves additional risk, as it almost inevitably will do.
We’re here to help
Even if your pension pot is small, giving up the relative security and safety of a Defined Benefit pension is not something you should do without high quality, independent financial advice.
Following the introduction of Pension Freedom there are now more reasons to consider a Defined Benefit transfer, but even after taking these into account, there are many significant disadvantages of such a move, which of course, is a one-way trip, you can’t change your mind if you get it wrong.
If you are considering transferring your Defined Benefit pension, or would like to know more about the advantages and disadvantages of such a move, we are here to help.
Call Bev or Sarah on 0115 933 8433 or email info@investmentsense.co.uk
