The financial hot topics at dinner parties used to be house prices.
Now though you’re as likely to hear people talking about final salary pensions and whether, or not, to transfer out.
By the way, final salary pensions are also often called defined benefit pensions. For simplicity we’ll continue to use the final salary term for the rest of this article.
Why the chatter?
Three key reasons:
- Pension Freedoms, which have now been around for two years, have given people far more flexibility in how they withdraw money from their pension. To access these freedoms though, people with final salary schemes need to move them to a money purchase (also known as defined contribution) arrangement such as a Personal Pension or Self-Investment Personal Pension (SIPP)
- Cash Equivalent Transfer Values (CETVs), the rather formal name for the amount of money you can move from your pension, have risen significantly over the past year or so. This is mostly due to the complex relationship final salary pensions have with gilts and bonds. Pension trustees trying to reduce their long-term liabilities also plays a part. Two subjects for articles on another day
- The confidence people have in their pensions is currently low. Scandals such as BHS have rocked people’s confidence in their pension, often unfairly, but as the old saying goes: “perception is reality”
These three factors have combined to lead millions of people to consider transferring their final salary pension.
There are undoubtedly reasons why, for some people, doing so is actually a good idea. Equally, there are many reasons to leave well alone. After all, a final salary pension provides a guaranteed source of income, usually hedged against inflation, with a pension for your spouse or civil partner when you die. That’s an attractive package, especially when we add in the protection offered by the Pension Protection Fund (PPF).
The benefits offered by final salary pensions is enviable. Nevertheless, the fear of missing out on ‘pension freedoms’ and, it has to be said, the tactics used by some unscrupulous ‘advisers’ are, we believe, causing some people to transfer their final salary pension when it isn’t in their best interests.
To understand whether a transfer is right for you a fair and unbiased assessment of your circumstances, your objectives and the pension itself is needed. To do this though, two things must be included
- A cashflow analysis: To give up the guarantees and inflation proofing of a final salary pension, without looking forward to predict your future income, and capital, requirements to confirm that these will continue to be met, is like jumping off a cliff without checking you have attached your parachute.
- Impartial advice: The pension freedom rules state that anyone with more than £30,000 in a final salary pension must take (although not necessarily accept) financial advice before the transfer goes ahead. For this independent advice to be both fair and impartial we believe it must be truly fee based. That means you pay the fee, irrespective of whether the advice is to transfer or maintain the status quo. Some advisers work on what’s known as a ‘contingent’ model. This means they only get paid if they recommend you transfer your pension, creating a conflict of interests, which we believe impacts the adviser’s ability to be fair and transparent. The only way to guarantee impartial advice is to pay a fee for the advice and accept the outcome.
Advice and financial projections: Don’t transfer without them
There’s no second chances with final salary transfer.
Once you’ve made your decision, even if it’s the wrong one which you live to regret, there’s no going back.
That’s why is must be carefully thought through. All the pros and cons, need to be carefully weighed up by an adviser who uses sophisticated cashflow modelling tools, to confirm how the decision to transfer will affect you both now and in decades to come and by an adviser whose advice is impartial.
This article is the first in a series to highlight key issues our clients face and how financial forecasting can offer part of the solution.
We know the benefits it brings to our clients and how, as part of a comprehensive financial plan, it can help you achieve your goals and objectives.
To learn more about financial forecasting call us on 0113 262 1242.