Category: Pension Transfer

New Guidelines on Pension Transfers – and how to spot a great adviser!


Your pension is a vital part of your financial future, especially if you are considering transferring from a defined benefit to defined contribution scheme.

It’s fair to say that, as Defined Benefit (DB) pensions and other safeguarded benefits generally provide a guaranteed pension income, most consumers will be well advised to stay put.

But with the ever-changing pensions environment, bought about through the introduction of the pension freedoms, that provide more options to access you pension savings, there is an growing demand to access pension savings.

As a result of this desire to access pensions, earlier this month the Financial Conduct Authority (FCA) issued new rules and guides regarding how advice should be provided to you on pension transfers. These are designed to make sure that advisers fully consider the client’s circumstances and properly consider the various options, where clients may be considering giving-up safeguarded benefits.

Although these guidelines are aimed at firms advising on pension transfers and those advisers acting as pension transfer specialists, I always feel that clients should know just what great advisers are aiming to achieve. As it helps you distinguish between a good adviser and a great adviser.

So what does great advice look like?

Apart from the obvious increase in the rigor around qualifications needs by advisers to provide advice in the pensions transfer marketplace, the FCA has also provided best practice guidelines for providing advice.

Quite rightly the FCA maintain that any adviser should start from the assumption that any form of pension transfer will be unsuitable for their client. This starting point has come from the high proportions of unsuitable advice the FCA have seen in supervisory work.

This assumption that a transfer is unsuitable is actually a smart position to take, as it means that the adviser then has to demonstrate why a pension transfer is the right thing for their client.

The FCA go on to highlight a need for better consideration regarding how pension transfers should be paid for by clients.
With this in mind, the new rules and guidance will include the following:

  • All advice on pension transfers must be personally recommended by the adviser
  • There should be a greater clarification of the role of the Pension Transfer Specialist (PTS) when checking advice being provided
  • Greater analysis to support the advice being given – The FCA aim to replace the current Transfer Value Analysis (TVAS) requirement with a new requirement to undertake an ‘appropriate pension transfer analysis’ (APTA) of a client’s options. There should also be a prescribed Transfer Value Comparator (TVC) that indicates the value of the benefits being waivered, along with the true cost of purchasing the same income in a defined contribution environment
  • There should be a consistent approach applied to pension opt-outs where there are any potential safeguarded benefits
  • The adviser should consider the proposed destination of the transferred funds, including both the proposed scheme as well as the investments being proposed within that scheme. This review should take into account the client’s attitude to transfer risk, as well as their attitude to investment risk

This also means that where a firm/adviser is assessing the client’s attitude and understanding of the risks involved in giving-up safeguarded benefits in exchange for flexible benefits, then they should consider the following:

  • the benefits and the risks for staying in the original safeguarded scheme
  • the benefits and the risks of transferring out to a flexible benefits scheme
  • the attitude of the client regarding certainty of income throughout retirement
  • if the client is likely to want unplanned access to the funds and the associated impact of that on the funds long-term sustainability
  • the client’s attitude to any restricted access of their funds in a safeguarded benefits scheme
  • their client’s attitude to managing investments themselves, or to paying for them to be managed in a flexible benefit scheme.

Knowledge is power – and we’re here to help answer your questions

All I ever aim for in my blogs is to share knowledge with you, give you the heads up on important changes coming your way. If you are considering a pension transfer, then there is nothing more important on the immediate and predictable horizon than these changes.

They are being introduced right now to protect you and your investments and by reading through the proposed changes I hope that it has given you a greater understanding of pension transfers, as well as better enabling you to make the right decisions regarding your own circumstances.

Record High Transfer Values: A Good Time to Act?

In a world full of uncertainties and low interest rates, final salary pension schemes are widely considered a treasure but they can be inflexible and are often not specifically targeted at individual members’ needs. Members of such schemes often transfer out for a variety of reasons. These include: to access greater flexibility under the new pensions freedoms brought in last year; to draw their cash lump sum to reduce debt and to ensure that their families better benefit from the fund, in the event of their death.

In the recent months we have seen transfer values (the capital value of the benefits promised by a scheme, sometimes called the CETV or Cash Equivalent Transfer Value) at unusually high levels – sometimes as much as 40x the annual pension income. This has been driven by recent reductions in government bond returns brought about by the Brexit vote and also the measures taken by The Bank of England to prop up the economy. It is fair to say that this combination of factors is unusual and likely to be short lasting. When Bond returns revert to their traditional range, it would be reasonable to expect transfer values to reduce. So there is a bit of a window of opportunity to extract quite a bit of value for your pension, which can not be expected to last. This is definitely a good time to review whether your final salary pension is in the right place.

Differences Between Pension Schemes

One important thing to point out is that different pension schemes use a variety of factors when calculating transfer values. These include your current age and when you are entitled to draw the benefit, as well as the scheme specification in terms of escalation of benefits before and after retirement and any spouses and dependents benefits. In general, the closer you are to retirement, the higher the CETV multiple. Conversely, the more time left for the assets to grow, the lower the present value. The only way to know the exact figure is to request a CETV quotation from your pension provider. The state of funding and therefore the security of your benefits can have a bearing on the transfer value as well. If the scheme is very underfunded, transfers values can be subject to a discount.

When to Transfer (and When Not)

Guaranteed income is the main advantage of defined benefit schemes. When you transfer to a defined contribution scheme, you lose these guarantees and your future pension income will depend on returns earned on the invested assets. When you get a CETV quotation, you can actually calculate the exact rate of return needed to beat the income which you would have received from the old final salary scheme. The current high CETV multiples make these required rates of return lower than usual – sometimes as low as one percentage point above inflation.

When transferring out of a final salary scheme, investment risk shifts from the pension provider to you. One of the key things to consider when deciding about a transfer is your ability and willingness to take this risk. The former is mostly about your financial situation and whether you have other assets and income sources to possibly rely on in case your investment returns turn out lower than expected. The latter is mainly about your risk attitude and psychological factors.

Risk and return are major parts of the decision, but not the only ones. Your existing pension plan may come with other (often non-financial) benefits which you would be giving up. At the same time, final salary schemes are typically quite restrictive and inflexible – transferring out opens up new ways to access your pension pot and thereby new options for retirement and inheritance tax planning.

To sum up, those with more wealth and other assets besides their pension, those who intend to pass a substantial portion of wealth to children, or those looking for greater flexibility and control over their retirement savings are more likely to find a transfer suitable. Conversely, those with limited assets and those who prefer security and guaranteed income will probably want to keep their existing final salary scheme. These are, of course, generalisations – the actual decision will depend on the particular numbers, as well as many unique, personal factors.

The Window of Opportunity

While a decision to transfer a pension must never be taken lightly or made hastily, keep in mind that the current high transfer values are caused by recent short term market developments and these are unlikely to last. When bond rates go up, the CETV multiples can be expected to decline.

Contact us now for a free initial consultation to check out your options. You can find more details about our pension transfer advisory process by visiting our sections on UK Pension Transfers and Expat pension Transfers