The facts and fiction of DB pension transfers

Because so few Pension Specialists exist, some have chosen to have a significant number of lesser qualified IFAs feed business into them. This can even extend to the likes of mortgage brokers as is the case with The Mortgage Finance Store in Dundee and Capital & Income Solutions based in Leeds (link).

To be clear, all introducers not holding a Pension Specialist qualification or authorisation are strictly prohibited from giving advice on defined benefit pension transfers and to the extent that it is a criminal offence to do so.

In the past, leaving a DB scheme meant buying an annuity. Henceforth, this was no longer the case. You could now obtain the Cash Equivalent Transfer Value (CETV) of your fund, take your 25% tax free lump sum as normal then basically draw your pension as you saw fit. This was a great fit for some who were attracted to the thought of a nice lump sum and perhaps in advance of their DB scheme retrial age. Dependant on their current income, they could then also either elect to take a monthly payment from their fund or chose to turn on the tap at some future point in time.

Even more exciting for some, subject often to high tax charges, you could draw more than your tax-free lump sum. Precisely the reason Mr Osborne was being so nice in the first place – more lovely revenue for the Treasury.

Wrong. These funds are like the proverbial gold bars. A safe haven for your retirement even via the Pension Protection Fund in the event your employer becomes insolvent. Not just that, they have huge inbuilt benefits and guarantees during your working lifetime and also when you retire. There is a commitment from the scheme to pay you until the day you die and normally with annual increments meaning your pension is inflation proof.

They can also give valuable income to spouses and other loved ones in the event you pass away. Little wonder then with rapidly increasing life expectancy rates why employers have rushed to close these schemes down and to even offer attractive uplifts on CETV values to encourage existing members to move elsewhere. In short, if it is a liability, they are desperate to offload, why would you ever want to leave?

Absolutely not. Transferring away means firstly losing all the built-in benefits and guarantees of your DB fund and especially over that final three-year period. Staying put also means not having to pay initial advice fees of anything up to 6% of your CETV or ongoing adviser and fund charges. It also means not risking the considerable vagaries of the stock market.

All too often, Pension Specialists see moving as the only option. They simply choose to ignore the holistic approach to financial planning, be it from the point of lack of knowledge or perhaps more worryingly, self-interest.

Let’s demonstrate this by looking at a DB pension transfer with a CETV of 400k. A typical initial advice charge to move might be 4% or £16,000. You would then likely have ongoing adviser and funds charges of  not less than 1% on a £300k pot after taking your 25% lump sum of £100,000, equating to an additional cost of £3k per annum or £9000 over the three-year period in this example. In reality, these fees would be payable until the day you die, which might be as far away as another 30 years and representing an astonishing £90,000 of extra cost to your fund.

In comparison, should you have sufficient equity in your property, you may have the option to borrow the same £100,000 on an interest-only basis until age 60 when this could be at least substantially, if not fully, cleared at the point of reaching your DB scheme retiral age and having access to your lump sum.

With interest rates as low as 2% or less, this would only represent a cost of £1000 per annum and a total of £3000 in this case. Fees (broker or lender) plus legal costs might increase the figure to, say, £4000. This is in comparison to a pension solution cost over the same period of a massive £25,000 and if you lived to 90, of an eye watering £115,000.

No. Sadly, Pension Specialists often chose to base a significant part of their justification to move around this one point alone. Frequently, life cover can be bought for the merest fraction in comparison to cost of the initial and ongoing fees incurred when a DB pension is moved.