Final Salary Pension Transfers29th November 2015
The new pension rules, which came into effect in April 2015, have provided members of defined contribution pension schemes with unprecedented freedom and flexibility over the access of funds at retirement. Savers can choose to take their entire pension pot as lump sum, purchase an annuity for guaranteed income or keep the pension invested and withdraw funds as needed.
These new flexibilities are not available to those with final salary, also known as defined benefit, pension schemes. Therefore, many are considering transferring their pension to a defined contribution plan.
Should I Transfer My Final Salary Pension?
Transferring your pension is a decision which must not be made without careful analysis of all costs, benefits and risks. There are complex economic, tax and legal implications. Furthermore, different pension schemes come with different rules and different benefits, which you may lose when transferring out. Getting professional advice is therefore absolutely essential and in some cases (if the transfer value exceeds £30,000) required by law.
For most people, the greatest benefit of final salary schemes is the guaranteed income. With a defined contribution plan, the value of your pension pot and retirement income will no longer be guaranteed, but depend on the actual market return on the investments, effectively transferring the market risk from the provider to you.
That said, staying in a defined benefit scheme is not risk-free either. There have been cases of companies going bankrupt and leaving insufficient assets to pay all their employees’ pensions. The Pension Protection Fund should compensate the affected members in such cases, but the compensation may not represent the full amount.
Making the Decision
Based on the details of your existing and new pension plan, transfer costs and other factors, your adviser will come up with an overview of advantages and disadvantages and calculate a required rate of return, which the new pension plan’s investments must beat to make the transfer worth it. Your risk attitude, other personal circumstances and the situation in the financial markets will also be assessed in order to decide whether the transfer is in your best interests.
How Defined Benefit Pension Transfers Work
There is one thing you need not only for the actual transfer process to start, but also for the above mentioned analysis. You need to get the transfer value quote and various other information from your existing pension plan provider. This is not as simple or as fast as many people would think.
While some defined benefit schemes respond to information requests within 2 or 3 weeks, others take as long as 10-12 weeks (the legal limit is 3 months).
Once you get the transfer value quote, it is only valid for 3 months. Within this timeframe you (and your adviser) must perform the comprehensive analysis, make the decision and complete all the required paperwork for the transfer to proceed. Lots of little details are needed for each of these tasks.
There is little uniformity amongst schemes and if you don’t ask the right questions when first requesting information, you may find some of the necessary details missing and may need to ask for additional information. Unfortunately, the clock is ticking and you won’t get your 3 months’ deadline extended. Furthermore, scheme members are only entitled to a transfer value quote once per year. If you miss the deadline, you will have to wait a long time for another try.
If your transfer value exceeds £30,000 you are required by law to consult an FCA accredited pension transfer specialist. Even if it’s smaller, seeking professional advice is still a good idea, given the complexity of the decision and the transfer process.
Although you can request the transfer value from your existing pension scheme yourself, it is much better to let your adviser formulate the request, to make sure the right questions are asked and all the necessary information is obtained at the first try. Otherwise there might be delays and complications, causing you to either make your eventual transfer decision in haste or missing the 3 months’ deadline altogether.
Once you have made the decision and submitted the transfer instruction, expect further delays. While a good adviser will be able to minimize the complications and delays on your end, the defined benefit scheme’s trustees and managers are usually the main bottleneck. Depending on your pension provider, the transfer may take from just a few weeks to as much as 9 months.Share: