Should I Stay or Should I Go Now?!
Reasons for Staying or Leaving a Defined Benefit Final Salary Pension Scheme.
Defined benefit final salary pension schemes (DB schemes) are typically the sort of pension provided in the past by large employers of public bodies. Your pension is calculated using the number of pensionable years you have worked with the employer and the salary that you have earned.
Since George Osborne introduced pension freedom in April 2015, vast numbers of pension holders have taken the option of moving their DB pensions elsewhere.
Quite rightly, the FCA who regulate the industry, have been concerned for some time about this rapid acceleration in numbers leaving the safe haven of a DB scheme. They point out that it is far from something for everyone and the opening gambit should be that it is not a good idea. It is then a case of working backwards from that position to see if personal and family circumstances and finances dictate that it might be an option to be considered.
All firms advising on transferring away from a DB scheme to a defined contribution (DC) scheme must have a pension specialist within their business. Only a little over 20% of all IFAs hold the necessary qualifications and authorisation.
It is the adviser’s job to collate and analyse your personal and family circumstances, your financial position and your appetite for risk. They should also check how well funded any existing scheme is.
They then must fully compare the benefits that you are sacrificing by leaving with what can be reasonably achieved by moving away, for example, in terms of superior growth. It is a question of then presenting the full facts to you in some detail, including cash flow modelling and comparative life insurance quotes if it is essential for you that on death, your remaining fund, for example, goes to a partner or children. It also makes good sense to involve your partner in the decision making.
Finally, if some current or former workplace colleagues have also recently transferred out using the same advisory firm, you should research if they have all been recommended the same solution/provider. This can be a real issue. Everybody’s finances are different and when it comes to the very serious business of transferring a DB scheme, it is absolutely not the case that one size fits all.
Three absolutely key issues are –
Remaining – It is a secure income for life that will never run out and increases each year, either partially or fully inflation-proofing your pension.
Leaving – Your secure income is given up and you are open to the vagaries of the stock market. Of course, it could increase, but any collapse could see your pension severely depleted and risk it running out significantly in advance of what was initially projected – A huge risk if your income is significantly dependent on your pension.
Remaining – You aren’t personally liable for the cost of running your DB scheme. It is a shared cost covered by the members.
Leaving – You will have costs for initial and ongoing charges. Pension specialists normally charge an initial fee of anything from a moderate figure to cover their costs and time up to a massive 6% of your transfer value. On a £500,000 pot, this could see your fund immediately depleted by as much as £30,000. In essence, every pension specialist is performing exactly the same analysis. It is perhaps difficult to fathom why some feel the need to charge as much as four to five times the fee of another.
Ongoing fees can vary widely too. Adviser charges alone can be as low as 0.5% or as much as treble that figure. You then have to add fund charges and perhaps the those for the use of say a platform or SIPP. This means more money biting into your pension fund every single year.
Remaining – When you pass away, your DB scheme will normally continue to pay a portion of your pension to your spouse or civil partner, or on the event that they pre-decease, then your dependants. Schemes, of course, vary, but typically older children over 21 do not qualify.
Leaving – In the event you transfer away and move your fund elsewhere, it does mean that what is left of your pension upon death can be left to your loved ones. Furthermore, on the event that you pass away before age 75, the pot is tax exempt.
This is often a strong argument put up for those recommending that you leave a DB scheme. This however is a “risk” that you can quite easily cover by taking life insurance. Quotes in any event must be prepared as part of any advice process on DB transfers. The cost of protection may, for example, be significantly less than even the initial advice fee.
You should also consider the time value of money. Taking a regular payment from your released pension could see the balance itself eroded after time. You then have to factor in the influence of inflation, meaning the physical value of any pension pot remaining at point of death may be considerably less than its true value today.
If, since pension freedom in April 2015, you have been advised to leave a defined benefit final salary pension and transfer your fund elsewhere and you would like to check on the advice you were given, Beat the Banks are here to help.
Our free check can establish if poor advice means you are out of pocket. To find out more, call 01382 200474 or text Pension to 87007