Savers are being tempted to give up valuable final salary pensions and run the risk of investing their pots in the financial markets instead, but whether this is a sensible idea will rest on your individual circumstances.
So where do you start if you are considering this crucial retirement decision?
You must pay for financial advice before moving a final salary pension worth £30,000-plus, which is an important safeguard against making an irreversible decision that could ruin your retirement if it goes wrong. So, it’s a useful exercise to find out if there any obvious red flags BEFORE before you fork out for professional advice.
Pension giant Aegon has therefore compiled the following seven questions to ask yourself at the outset – with the very big caveat that this is for illustration only and should not determine your decision. A decent financial adviser will go into all your circumstances in detail and give you a fully informed recommendation.
Employers often dangle gigantic offers potentially worth hundreds of thousands of pounds in front of savers to clear expensive obligations to pay final salary – also known as ‘defined benefit’ – pensions off their books.
Workers who accept such deals give up a guaranteed income for life, and typically generous payouts to spouses should they die before them, in exchange for large sums paid into inferior pensions they must invest themselves.
But they gain greater control over their fund, the ability to pull all the cash from a pension after the age of 55, and much more flexibility over who is allowed to inherit their retirement pots.
How did you answer and what do your results mean?
‘The table sets out some of questions which may help you decide whether or not you wish to seek advice on transferring from a defined benefit or final salary scheme,’ says Aegon.
‘If your answers include a number of greens, then as a rule of thumb, it may be worth exploring further although this DOES NOT suggest you should actually transfer.
‘If you have one or more red answer, then the rule of thumb is it may be less worth exploring transferring although again this DOES NOT mean you definitely should not transfer.
‘If you seek advice, your adviser will consider all of your personal circumstances and make a personal recommendation based on these.’
The pitfalls of giving up final salary pensions too readily were exposed in the recent British Steel debacle. In that case,vulture advisers swooped in to exploit workers in a mis-selling scandal that MPs warned could threaten many other savers.
Watchdogs could ban financial advisers from offering ‘no transfer, no fee’ deals to savers looking to ditch final salary pensions as a result, due to fears such offers cause conflicts of interest that can influence their recommendations.
The Financial Conduct Authority is also looking at whether advisers should offer a ‘triage service’, which means they could give savers an initial heads-up on whether it is worth paying for a full-scale recommendation on a transfer. However, its current consultation suggests it would place severe restrictions on such an approach in case this was taken as advice. The FCA is due to announce proposals in the autumn.
Aegon is in favour of the triage approach, saying it would be beneficial for everyone to cut short the process, saving time and money and allowing advisers to focus on customers more likely to benefit from transferring.
‘In medical terms, “triage” involves a professional assessing an individual’s circumstances and determining next steps and their priority,’ said Steven Cameron, pensions director at Aegon. ‘ But the triage being proposed for defined benefit transfers excludes any professional assessment and is closer to self-diagnosis through google.’
‘We are calling for the FCA to explore what more advisers can offer within guidance to help customers reach an early decision. It’s positive that the FCA has set out a non-exhaustive list of considerations for advisers and we’d like to explore if this could be turned into a standardised traffic lights guide for consumers wondering if it’s worth their while seeking advice. This could be promoted by advisers, guidance bodies and trustees.’
But Cameron believes the FCA should explore how ‘no transfer, no fee’ – also known as ‘contingent’ – charges could continue so advisers and their clients have a range of options for paying for advice, and that isolated instances of bad practice shouldn’t constrain this.
‘Contingent charging comes in many shapes and sizes, including separate fees for different stages of the advice process. We believe an outright ban of all types would mean fewer individuals would seek advice, widening the “advice gap”.
‘There is now huge attention from the regulator in this field, and advice will be checked by the adviser firm’s compliance department and a pensions transfer specialist.’
Why are people giving up final salary pensions?
Final salary or ‘defined benefit’ pensions are typically generous and provide a guaranteed income for life.
But increasing number of people are tempted to give them up for a range of reasons – the huge offers they receive from employers, the desire to invest their savings in the hope they will continue to grow, and the opportunity to leave whatever is left over to loved ones when they die.
Meanwhile, pension freedoms launched in 2015 give people in ‘defined contribution’ schemes, where they and employers contribute to a pot that’s invested for retirement, the power to do what they want with their savings once they reach the age of 55.
Those still saving into final salary pensions cannot take advantage of these freedoms unless they transfer to a defined contribution scheme, but they have to get financial advice if their pot is worth £30,000-plus.
However, leaving a final salary pension scheme means people must bear all the investment risks to their retirement pot going forward.
Pension freedom: Savers are being tempted to give up valuable final salary pensions and run the risk of investing their pots in the financial markets instead, but whether this is a sensible idea will rest on your individual circumstances
What else should you consider before moving a final salary pension?
Guidance to British Steel savers offered by Michelle Cracknell of The Pensions Advisory Service applies to any one thinking of giving up valuable final salary pension benefits. Here’s a quick checklist:
* Be aware that investment schemes promising high returns could be scams
* Remember a guaranteed, inflation-proofed income for life is very valuable
* Be prepared for the ongoing work of managing your own pension investments if you transfer out
* Your personal situation may be very different from other people’s, so don’t just follow what they do
* Consider the benefits available for your husband or wife and consult them
* Only use financial advisers who are regulated by the Financial Conduct Authority – check here
* Ask for help from the free and independent TPAS helpline on 0800 011 3797.
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