Considering a transfer out of a final salary pension? Don’t do a thing without professional advice.
Since the introduction of pension freedoms in April 2015, there has been a significant increase in the number of people considering transferring their final salary pension scheme benefits. The increased flexibility in retirement and ability to pass the fund to any nominated beneficiary on death has made Personal Pensions which may then become Flexi-Access Drawdown funds in retirement, more attractive.
However, in order to achieve this extra flexibility, a final salary pension scheme member must give up guarantees. Anyone considering a transfer of a final salary pension scheme should consider the current guarantees and the long term implications of giving up a fixed pension that has no charges or fees, no inflation risk and no investment risk.
If you are considering a transfer out, the first step is to find a suitably qualified Pension Transfer Specialist, as not all financial planners, wealth managers are qualified, or authorised by the Financial Conduct Authority (FCA) to advise on this type of business. The FCA are currently reviewing their rules and guidance aimed at ensuring advice firms operate within a frame work which enables them to give good quality advice so that individuals make better informed decisions. Firms that are authorised to give advice in this area will have to undertake an “appropriate pension transfer analysis” of the individual’s options and a prescribed transfer value comparator, indicating the value of the benefits being given up and the cost of purchasing the same income in a money purchase environment. It is a complicated and specialist subject that requires professional advice.
The temptation to transfer can be more appealing to those who do not have significant savings and investments outside of their pension pot, yet they may not have a full understanding on how much money they require to live on for the duration of their retirement. Unfortunately, there are several recent cases where the proper advice has not been implemented with grave consequences, such as British Steel. The FCA has recently held discussions with a number of advice firms in connection with advice given in connection with pension transfers.
A particular area of advice in final salary transfers that is coming under closer scrutiny is the use of financial forecasting tools (also referred to as cash-flow or ‘what if’ modelling tools). Some firms, Acumen Financial Planning included, use this as an integral part of the financial planning process, however many firms do not. They are a fundamental planning tool used by financial planners that help individuals make informed decisions and can be used to give an early indication of what lies ahead and simulate “what if” scenarios such as transferring out of a final salary pension scheme, stock market crashes, early retirement or early mortality. This planning tool combined with the expertise of a financial planner demonstrates to the individual whether or not they can sustain current regular expenditure from their pension income and any life goals, such as early retirement or a holiday home abroad, with the ultimate goal to never run out of money.
This process will also identify any surplus of pension resources ahead of time and highlight less of a reliance on the guarantees that a final salary pension scheme offers. Likewise a deficit may highlight a greater reliance on the guaranteed income and indeed a requirement to reduce regular expenditure, save more and / or work beyond the individuals desired retirement age. A good Financial Planner’s top priority for their clients should be to ensure that they never run out of money and avoid the temptation to use pension freedoms to over-spend. Without creating a bespoke model for each individual and stress testing different scenarios, how can Financial Planners robustly justify their advice?
Some employers are offering what they call “enhanced” transfer values to make a transfer out of the final salary scheme appear more attractive. These individuals should still go through a rigorous advice process to establish whether or not they should transfer out of the scheme and that doing so is for the right reasons.
Once a final salary pension scheme has been transferred, there is no going back. It is not possible to revert the decision and transfer back into the scheme. It is therefore vital that any individual considering transferring their benefits seeks advice from a firm with the appropriate principles and qualifications and skills.
Kevin Mackenzie is a Pension Transfer Specialist with Acumen Financial Planning and is based at their Aberdeen office at Arnhall Business Park, Westhill.