The final salary pension transfer process is far from straightforward. In this post, we outline what is involved in reaching a decision to transfer (or not). It is important those considering a final salary pension transfer understand the time, effort and costs involved.
Any potential pension transfer should be given serious consideration. The process is time consuming but that is generally a good thing. It leaves plenty of time to carefully consider the benefits and risks of a transfer and the potential impact on personal circumstances.
The first step is to fully understand the benefits and risks of a final salary pension transfer. It is a legal requirement to seek financial advice on the suitability of a transfer if a pension fund exceeds £30,000 and that usually involves a cost. In practice, many pension funds will impose a requirement to take professional advice even if the pension fund value is less than the £30,000 limit.
Stage 1 of the process is generally as follows:
- Identify the rules of your current scheme.
- Understand the cash equivalent transfer value (CETV).
- Consider your options.
The entire process can take upto twelve months. To collect the information you need to start the pension transfer review process can take several months. Then, should you decide to action a pension transfer it can take up to six months for the funds to be released to your new pension provider.
You may wish to find an appropriate financial adviser at the very outset of your pension transfer considerations. Alternatively, you may choose to take on the initial information gathering activities yourself before taking advice.
Rules Of The Current Final Salary Pension Scheme
It is vitally important to understand what you will be giving up if you do decide to transfer. It is also important to understand the rules of your current scheme that relate to transfer.
To perform an initial review to determine if transfer from a final salary pension may be a valid option two key pieces of information are required. A transfer value and early retirement quote (if applicable).
It can take up to twelve weeks for the pension administrators to provide this information. You then have twelve weeks from issue of the transfer value quotation to start the transfer process. If, after due consideration, this is the route you wish to take.
Without this information you will not be in a position to consider all your options. You can request this information from your pension fund administrators or ask your financial adviser to request it on your behalf.
If you already have a transfer value, but it is more than three months from the date of issue, it will need to be recalculated. You are entitled to one free transfer value in any 12 month period. Most scheme administrators will charge a fee to recalculate the transfer value. The cost is usually between £250-£450, although some administrators do not charge.
Consider Your Options
Once you have a transfer value and early retirement quote you will need to discuss your options with a financial adviser.
A Financial Adviser will take the time to understand your unique set of circumstances, your objectives, your experience of managing investments and your attitude to risk. They will make a comparison between the transfer value and staying with the final salary scheme.
After making a comparison you may decide it is best to stay with your current scheme or you may be prepared to allocate more time and effort to consider the transfer option in more detail. If you do decide to proceed then stage 2 of the final salary pension transfer process involves the identification of:
- Your investment plan, strategy and management.
- The best pension plan to transfer to, its rules and benefits.
Costs Associated With The Pension Transfer Process
Should you decide to action a pension transfer there will be a fee for the advice. It is a legal requirement to seek appropriate financial advice on a transfer if the pension fund value is £30,000 or more.
There are various charging models in the marketplace. Some advisers charge an upfront fee regardless of whether a transfer takes place or not and an additional fee for the work if you then proceed. Other advisers (including The Pension Review Service) make no charge to consider if a transfer is appropriate given your individual circumstances and only charge if you do wish to make a transfer.
It is important to compare and contrast charging models between advisers. It is also important to check fees for any ongoing services and establish exactly what those services will be.
Fees to transfer are typically between 1 and 3 percent of the pension fund value but they can be much higher. This fee is often taken from the pension fund on transfer rather than as an upfront fee. Make sure you understand the way that the firm charges for its services and why it operates in the way that it does.
The adviser you deal with will have specialist qualifications and be subject to regulatory scrutiny which leads to increased business costs. Expect to pay more for your initial advice if you want to look after the fund yourself (self-invest) after the transfer has taken place. The adviser has a responsibility to establish where you will invest your pension savings and can be held to account if your investment strategy is not sound. There are also often fees associated with ongoing services (see below).
Your Investment Plan
It is important you consider how you will manage your pension fund if you do make a transfer. The issues surrounding investment management and risk will have been discussed with you during the pension transfer process. You should consider how those issues will be addressed going forward.
Most likely the transfer value will represent a significant proportion of your family wealth. It may be worth retaining a financial adviser to help with your ongoing investment and tax planning.
This will come at a cost, make sure you know what you are getting by way of ongoing service and access to advice. Ensure ALL fees are clearly detailed and you understand the potential impact of those fees on your pension fund over the long term. Ensure you understand the total ongoing cost of your investment, the fund manager fee, product fee and ongoing advice fee.
Our view is don’t be too cautious. Investing in cash will lead to an erosion of your wealth because of inflation and fees and don’t be overly speculative. You are preserving your wealth not attempting to “double the pot”.
Choosing A Financial Adviser
You may wish to find an appropriate financial adviser at the very outset of your final salary pension transfer considerations. Or you may choose to take on the initial information gathering activities (see below) yourself before taking advice.
If, after due consideration, you do wish to action a transfer you must show that you have taken financial advice from a qualified financial adviser before the pension scheme administrators will action the transfer. This is a legal requirement if the value of the pension fund is £30,000 or more.
When choosing a final salary pension transfer adviser you should ensure:
- They are authorised and regulated by the Financial Conduct Authority (check here https://register.fca.org.uk/).
- They have the relevant FCA permissions to discuss, advise and action defined benefit pension transfers.
- They have extensive experience of the pension transfer process.
The register will state if a firm is FCA authorised (or not) but it is not particularly user friendly. For those not familiar with the workings of the register it will be necessary to ask the Adviser to prove their specific permissions and experience.
Using an adviser who is not authorised by the FCA will put your pension fund at significant risk. While choosing an adviser without the relevant permissions can cause delays and increase fees. Selecting an adviser with appropriate experience (particularly experience of transfers from your scheme) reduces the risk of delays and/or mistakes.
A decent adviser should challenge you and guide you towards the right investment strategy. They should then monitor the fund performance and the fund manager on a regular basis. If you really cannot tolerate reasonable volatility (the movement up and down of your pension fund) then you should not be transferring your final salary pension.
At the end of the proces will need to understand the options open to you. The key risks associated with the transfer out of the final salary scheme, compared to those you may encounter if you remain, and the governing rules and tax position of the personal pension fund created by the transfer.
Your adviser will use the transfer value and retirement quote (if applicable), a review of your personal circumstances and objectives and other inputs and calculations to advise on your best way forward.
Crucially, you will need to understand what investment returns will be required from your new scheme to match the full benefits of the Final Salary Pension scheme you may leave behind. You need to understand how likely is it that those investment returns will be achieved?
It is important to take some time to carefully consider all that was discussed and the advice you received. Take the time to evaluate both the benefits and the risks of a transfer and avoid any snap decisions. The time and effort involved in the final salary pension transfer process should not be underestimated. If you are not willing, or able, to put in that effort on an ongoing basis then it is probably best to stay in your Final Salary Pension Scheme.
The past is not a guide to future performance. This blog is intended to provide a general review of certain topics and its purpose is to inform but NOT to recommend or support any specific investment or course of action. Tax rates apply at the time of writing and are subject to change. Tax rates apply to England and Wales.