You may want to transfer your final salary or defined benefit pension for a variety of reasons. Although transferring can be financially beneficial, the process complicated. The transfer can be to another employer, or if done at retirement it could be to an income drawdown product.
So, the decision to transfer should not be made lightly. This article outlines some things you should consider before making a pension transfer.
Should I seek pension transfer advice?
To help with your decision, it is a good idea to seek the services of a financial adviser. You might need to seek regulated financial advice:
If the scheme you want to transfer is a workplace defined benefit pension scheme and the value of your pension benefit is more than £30,000.
If this is the case, you legally have to take professional advice from a regulated financial adviser. This law is in place by the Financial Conduct Authority (FCA) and is there to make sure you make an informed decision.
If the value of your pension is less than £30,000, it is still a good idea to consider taking financial advice before transferring. This is so you make absolutely sure you make the best decision for you.
Taking financial advice also ensures you are protected if things go wrong, as you’ll be able to use the available complaints and compensation schemes.
How much does pension advice cost?
Advising on defined benefit pension transfers is a specialist area, whether that be taking early retirement, ill-health retirement or normal retirement. Advisers must meet the qualification requirements set by the FCA. This means advice on this area will not be cheap. Such charges vary, depending on factors like:
An adviser’s experience
The services offered by the adviser
The adviser’s cost base
The value of your pension
Although costs differ, as a ballpark:
The FCA suggests that the average charge is 2 percent to 3 per cent of the transfer value. So if your pension was valued at £140,000, you could expect to pay between £2,800 and £4,200
The Independent Advice Organisation concludes that on average, you can expect to pay £3,800 for pension transfer advice
How to get low-cost pension advice
Given the cost of pension transfer advice, it is worth exploring these low-cost pension transfer advice possibilities before contacting a private adviser:
First, you should check if your employer provides free access to regulated financial advice
As well as informing you on the pros and cons of transferring your pension, you can expect your adviser to:
Ask about your finances and personal circumstances. This is so they can assess how to proceed in a way that is best suited for you. The more information you have prepared when you meet an adviser, the more you will benefit. This includes clear details on the worth of your pension and other income
Check the difference between defined benefit and defined contribution arrangements
Give you a summary of the pros and cons of their approach
Ask if you’ve discussed your decision with your spouse or partner as your choice is likely to affect them too
Compare the benefits of transferring your pension and decide the best way forward
If you are transferring to a SIPP, your adviser will assess your options and create a portfolio for you. You can then decide whether to manage that portfolio yourself or pay an ongoing charge for an adviser to manage it
Can I transfer a defined benefit pension to a SIPP?
A SIPP is a self-invested personal pension. It offers more freedom of investment than you would have from a traditional personal pension provider. Most schemes will allow you to transfer to SIPP, but:
If you’re in an ‘unfunded’ public sector pension scheme, you will not be able to transfer your pension
Unfunded public sector schemes include the Teacher’s scheme and the NHS scheme
You are eligible to transfer if:
You’re in a private sector defined benefit scheme
You’re in a funded public sector pension scheme like the local government pension
Pension transfer value
If you decide to transfer, it is important to understand your pension transfer value. This is to make sure you’re getting a good deal:
Your pension transfer value is the cash sum equivalent of the benefits you’ve collected in your pension
A final salary pension transfer value is the sum of money your employer will offer if you leave the pension scheme, and give up your right to any future income from the plan
Cash equivalent transfer value
Before transferring, you must apply for a cash equivalent transfer value statement or a CETV. The CETV will:
Show your pension at the date of leaving the scheme
The way that the pension will increase in value until the point of your retirement
The transfer cash value available to you
It is an important piece of information:
You need it so you can compare your pension transfer value with your final salary pension transfer value. It is legally required that you get one before making a transfer.
If you are in a funded Final Salary Pension Scheme, you have the right to a CETV statement
Your scheme must provide this within 3 months of any request
However, you do not have a legal right to a CETV in the 12-month period before retirement