What do we mean by Pension Transfer?
Put simply, a Pension Transfer happens when you transfer out of the defined benefit (salary related) pension scheme that you have with your current, or old, employer. In doing so, you give up the guaranteed benefits associated with your current scheme, in return for a cash sum, the Cash Equivalent Transfer Value (CETV), that will be invested into another pension scheme. The new scheme could be another Defined Benefits scheme, your current workplace pension or a private pension such as a personal or stakeholder pension. It is also possible to transfer to bespoke pensions such as Self Invested Personal Pensions (SIPPs) and overseas pensions.
In general this is a highly complex transaction and there is much at stake because you will be giving up valuable guaranteed benefits and once done, there generally no going back. So it’s very important to ensure that you get the decision right. A good rule for this is, “if in doubt, don’t do it’.
Does your existing scheme allow for a Pension Transfer?
If you are in an unfunded public sector pension scheme e.g. the Teachers Scheme, Police, Armed Forces or NHS Superannuation Scheme, you will not be allowed to transfer your pension. Other public sector schemes such as the Local Government Pension Scheme and the Universities Superannuation Schemes do allow transfers. Most private sector schemes allow transfers.
What benefits do your existing scheme provide?
When you ceased to be an active member of your defined benefit pension scheme, you will have become entitled to a deferred pension – a pension payable from your normal retirement date based on your service with the employer. In simple terms, once provided, this can not be taken away from you. At worst it could be subject to a reduction should the employer go bust. I have commented on this below.
The term ‘frozen’ has commonly been used to describe pensions from old employers but nothing could be further from the truth. The deferred pension will be subject to inflationary increases between your date of leaving and the date when you draw your pension. So it could be worth a great deal more when you retire than the figure provided to you when you left service.
The deferred pension usually comes with valuable benefits payable to your dependants in the event of your death before or after retirement.
Importantly, the scheme carries all the investment risk for your deferred pension, not you. If you transfer away it is you who bears the investment and other risks. I will comment on these in my next piece.
How safe is your deferred pension?
A common tactic used by those who would encourage you to transfer your benefits out to an alternative pension scheme is to cast doubt on the safety of deferred pensions. So how safe are they?
The cost of providing your pension at retirement is supposed to be met by the pension scheme, which receives contributions from your ex-employer to cover this. Every three years the scheme funding is reviewed and contributions levels are adjusted. Due to a combination of investment returns and longer life expectancy, many schemes have fallen behind the level needed to fund members benefits. Where this applies the employers are required to make extra contributions. For ex-employees of most larger employers, you can take it that by the time you retire, your pension benefits, as originally promised will, most likely be paid.
However, what if the employer goes bust? Do you stand to lose everything? The answer is categorically: No! If the employer goes bust with an underfunded scheme, it will enter the Pension Protection Fund (PPF). For most members this will result in a 10% reduction in their pension entitlement. But, the PPF comes with inflation proofing and dependants death benefits. For a number of higher earning members, where their benefits exceed a certain level, a greater level of benefits could be lost, down to 90% of the maximum level. This is a problem for them.
So, for most people, their deferred pensions are very safe, backed by a government sponsored protection scheme and come with a considerable degree of inflation proofing. They should not be given up lightly!
The regulations around pension transfers
If you have a CETV in excess of £30,000 you are required to obtain advice from an independent financial adviser who has appropriate qualifications and who’s firm has been granted permission by the Financial Conduct Authority (FCA) to provide advice on pension transfers. Your existing scheme is required to verify that you have had the advice and that it has been provided by an adviser that meets the above criteria, before it can release the funds to the new scheme. Importantly, it is not required to verify what that advice was, whether to transfer, or not.
It is important to note two very important aspects about how the FCA requires advisers to consider pension transfer advice. The first is that the regulator requires advisers to start by assuming that for most people, a pension transfer will not be suitable. The second is that they should only recommend a transfer if they can clearly demonstrate, on contemporary evidence, that this would clearly be in the member’s best interests. This sets a very high bar. Whilst you can still transfer, once you have received the advice, even if not to transfer, you should really pay attention to the advice that has been provided to you. It has not been given to you for no good reasons.
In order to consider a transfer, you need to request a CETV from your pension scheme administrator. They have three months from the date they receive your request to issue this. When they issue the CETV they will notify you of the ‘guaranteed date’. In simple terms, if you intend to transfer, you must submit all the forms to facilitate this before this date. If you miss the date, you may need to apply for a new CETV. You are generally allowed one free CETV per year and a new one within the same year will result in a charge of anything up to £500. Not all schemes will allow a further CETV within the same year. It is therefore important that you obtain advice and act on it, as necessary, within the deadline.
Once you have applied for a transfer, assuming all documentation is received in good time, the scheme has a maximum of three months to make the payment to the new scheme.
The Holborn Pension Transfer Service
Holborn offers a highly robust Defined Benefit Pension advice service. This provided as a fully holistic advice service in which we start off by gaining a very thorough understanding of our clients personal and financial situation, their goals and attitude to risk. We are focussed on how ton achieve the goals rather than on what do to with the pension. We hold an initial free discussion with our clients to discuss their goals and the options for achieving them and whether a transfer is necessary to deliver them. If the client decides to proceed we will carry out an in-depth analysis of their benefits as well as the options to deliver their goals. We use sophisticated cashflow and pension scheme analysis software as well as psychometric investment risk analysis software. We may hold a number of discussions with client as the advice developers to ensure that all options have been considered. Finally we produce formal written recommendations, irrespective of whether we are recommending a transfer, or not.
A key component of our service is that we take a great deal of trouble to ensure that clients understand our advice. This is a specific regulatory requirement and is very much needed to ensure that clients make informed decisions. Once we have provided the formal recommendations, we hold a further discussion with clients in which they can ask questions about the advice but we also ask them questions to check that they have clearly understood key points of the advice.
Once the advice has been provided, if this is in favour of a transfer we will arrange the transfer and then provide an ongoing review service to ensure that the recommended plan performs in line with expectations. If we advise against a transfer, in accordance with FCA regulations, if requested by our client, we will provide formal confirmation of advice. This will enable them to transfer to a pension scheme of their choice although we will play no part in the transfer. In essence though, if a client wishes to transfer they are free to do, irrespective of our advice. Naturally we would advocate that clients pay heed to our carefully considered advice. But ultimately they are free to do as they wish with their assets.