A Final Salary pension scheme is an occupational pension that offers clients with particular guaranteed and safeguarded benefits linked to an accrual rate. People also commonly refer to it as a Defined Benefit pension scheme or DB pension scheme. For example, a Final Salary pension may be ‘index-linked’ meaning your pension benefits are guaranteed to grow to keep pace with rising prices. As such, people usually refer to Defined Benefit schemes as being ‘gold-plated’ because they are a valuable asset. They are different from Defined Contribution schemes.
A Defined Benefit pension transfer is the consolidation of your DB scheme into a private pension arrangement. Many clients are effectively giving up their rights to a guaranteed income for life in return for a one-off Cash Equivalent Transfer Value (CETV). The Financial Conduct Authority (FCA) has put in place strict advice procedures to protect any client considering transferring a Final Salary pension. That has increased the amount of work and costs associated with DB pension transfer. On the other hand, it ensures that clients receive higher quality financial advice.
The term Defined Benefit means holders of Final Salary pensions should be able to expect guaranteed benefits in retirement. These are not cast-iron guarantees though and are open to changes in UK pension legislation. The core issue is that the UK has a growing life expectancy. Many workers required to replace the baby boomers are falling as well as the fertility rates with rising birth control (The Financial Times).
UK Final Salary pensions have deficits of hundreds of billions with two-thirds of final salary schemes being in the red (This is Money). That is not because firms are unprofitable. They choose not to fund the deficits. In 2018, the largest 100 UK companies collectively paid £8.2bn back to Final Salary pension deficits. In the same year, though, their shareholder dividend payments rose to £84.4bn (The Financial Times).
The UK government may back pensioners and force big businesses to reduce pension deficits by cutting dividends and executive pay. However, a watering down of final salary benefits is likely.
The UK Government is facing pressure from big businesses for favourable changes to pension benefits legislation. The UK Government issued a green paper outlining plans for allowing businesses in financial difficulty to reduce Final Salary benefit payments by pegging increases against the Consumer Price Index (CPI) instead of the Retail Price Index (RPI).
The fact that this type of discussion is reaching parliament and the Government is releasing green papers is not good news for anyone with a Final Salary scheme. While certainly a valuable asset, there is an obvious risk in DB schemes, especially if there are insufficient funds to pay the promised value. The UK government may back pensioners and force big businesses to reduce pension deficits by cutting dividends and executive pay. However, based on history, a watering down of Final Salary benefits is likely.
Our former Chancellor, George Osborne announced UK pension freedom rules in 2015. These updates allowed people to access their pension benefits from age 55. Their introduction was a government ‘stealth tax’ (Business Dictionary). As only the first 25% of a UK pension is tax-free. The remaining 75% is taxable. For example, an individual earning £100k pa withdrawing £125k from a £250k UK pension would endure taxes of £25k (£62.5k * 40%).
Despite the legislation being enacted in 2015, DB schemes set their own access rules (Which, 2019). It means nearly all investors must wait until the Normal Retirement Age of 60 or 65. They cannot take their Final Salary pension benefits at age 55. For many clients, this is a critical driver in considering transferring their Final Salary pension. They may wish to have the right to pension freedoms for personal purchases, property deposits or even ill health or high debts.
Transfer values offered to investors have reached a record high in August 2019 (The Financial Times). This is as a result of investors increasing investments into UK long-dated gilts which are used to calculate pension transfer values.
The Financial Conduct Authority confirmed that 390,000 people had used pension freedom rules to access DB pension pots over the past three years. It is a growing trend. For anyone who has a DB pension scheme, obtaining your current transfer value would be prudent. Talk to our Adviser today to learn more about getting your transfer value.
Transferring a Final Salary pension transfer grants you to access your pension from age 55 instead of 60 or 65 (NRA). Along with your state pension, this pension is meant to provide an income for you throughout your retirement. As such, we do not advise to withdraw all your pension early, but the flexibility from 55 can be an advantage.
Some clients prefer to take their 25% tax-free lump sum at 55 and the remaining taxable 75% once they are retired. That is a good strategy as once retired their annual income and tax bracket drops. They are resulting in a lower tax. Your retirement destination may also offer a lower rate of tax than the UK, making later withdrawals more tax-efficient.
Recent high profile cases such as BHS have highlighted the ticking time bomb of underfunded DB schemes. In 2015, Sir Phillip Green sold BHS for £1 and left his 20,000 DB scheme members a funding deficit of £571m (The Independent). It means the benefits the scheme had promised to pay (pension benefit income) exceed the value of its financial portfolio (underlying investments).
Sir Phillip Green bought BHS for a sum of £200m in 2000. The sale would appear to have created a massive loss for him. However, his wife received a dividend payment of £400m in 2012 on which she paid no tax as she is a resident in Monaco (The Business Insider). Understanding the health of your DB scheme is essential. Our Advisers are here to help.
Each quarter you will get an update on how your pension is performing and what can be done to improve future performance. This servicing engages you with your money again. It is also an opportunity for you to relay any changes in your finances that may affect your pension planning.
For example, a planned purchase of a holiday home or helping your children get their foot on the property ladder might affect your decision. You can discuss this with your Financial Adviser and plan from where the money will come.
A Defined Benefit pension transfer scheme gives you access to every fund, ETF and shares listed on the market. Your Financial Adviser will complete an analysis of your risk profile and advise the portfolio with a proven track record that matches your profile.
You can be as involved or as hands-off with portfolio and investment selection as you wish. Some clients prefer the Adviser to make all recommendations, while others may have more knowledge about a specific sector.
You have full control over your pension benefits. For example, on a £250k pension, over ten years, you could withdraw £100k in year 1, £100k in year 5, or £100k in year 10. Matching your fluctuating income needs and also managing your liability to tax.
In contrast, upon reaching your NRA of 60 or 65 in your DB pension, you will be forced to take, for example, annual pensions of £10k, paid on January 1st each year. In our experience, clients prefer controlling their pension income.
Your Final Salary pension has strict rules on what happens to your £250k pension benefits when you die. The scheme will typically pay your spouse 50% of your annual pension, so £5k pa from your £10k pa pension. Should your spouse outlive you by 20 years, they will receive a total pension income of £100k (£5k * 20 years). If you do not have a spouse, your DB scheme is not obliged to pay the £5k to your other heirs.
Completing a Final Salary pension transfer guarantees the entirety of your £250k pot passes directly to your spouse (or nominated beneficiaries) in the event of your death. Were your spouse to pass away, their designated beneficiaries, which may be your children, would inherit the £250k pension again. Transferring your DB pension can be valuable financial planning in protecting family wealth for future generations.
Once your pension transfer is complete, you cannot change your mind and go back. You are effectively exchanging your rights to a guaranteed pension in return for a one-off lump sum amount. Whether a transfer is in your interest or not depends on numerous factors.
Primarily, whether the quality of CETV they have offered you, which involves technical analysis, secondly, it depends on your lifestyle and whether you may need to access the capital.
An International SIPP or QROP has no built-in inflation protection. Your annual growth is linked solely to portfolio growth. Portfolio values can rise as well as drop. The long term upward trend of equities has been persistent for at a century though, with indexes setting new records every decade (Reuters, 2019).
The S&P 500 (US market) and global indexes such as the FTSE100 have closed at record highs on an average of 13 days each year. As such, your pension benefits in a private pension is not guaranteed to increase every year. However, equity markets do have a long term track record of performance.
Qualified and regulated pension transfer advice is not free. Ensuring you have an educated understanding of which type of pension transfer is most in line with your requirements is an important decision though. Seeking financial advice from a pension transfer specialist who can thoroughly analyse your DB scheme is a valuable investment.
They will either advise you not to transfer, outlining the grounds for this, or conversely, the reasons why you should transfer. At Cameron James, we work on a UK RDR transparent fee basis. That means, all our clients know exactly how much their DB transfer advice will cost in advance. There are no concealed fees or additional charges. Learn more about our fees on Our Costs Section.
As discussed, your pension income will be fully accessible after taking your cash equivalent transfer. There is nothing to stop you from withdrawing your tax-free lump sum and the remainder of your pension income in the first five years of pensionable age.
Your pension is there to provide you with a guaranteed income for life, so there is a danger that you may spend your pension income too early. Our Financial Advisers are there to advise our clients on matters such as withdrawals. However, ultimately, we could never stop you from making pension withdrawals as it is your choice.
By transferring your Defined Benefit scheme, you will lose your rights to the Pension Protect Fund. The Pension Protection Fund was introduced in 2005 by the UK Government to protect people if their DB pension fund becomes insolvent. There is however an annual cap of £33,219.36 which for clients with larger DB schemes over £1m may mean you would receive your full pensionable earnings in the event of insolvency.
A Letter of Authority (LOA) is a one-page document that allows us to contact your Final Salary pension provider and request all relevant information about your policy. An LOA does not allow anyone to transfer, change or alter in your pension in any way shape or form.
Completing this document does not commit you to do anything with your pension. It easily allows our team to gather all the required information for a detailed analysis. Final Salary schemes usually receive many valuation requests and their turnaround times are frequently longer than other UK pensions.
An LOA does not allow anyone to transfer, change or alter anything in your pension. It simply allows our team to gather all the relevant information needed for an accurate analysis.
One of the most critical pieces of details is the transfer value itself. It is usually called a Cash Equivalent Transfer Value. A CETV is effectively a lump sum payment that your scheme offers you in exchange for your rights to the safeguarded benefits. CETV lump sum is meant to be an exact equivalent of what it would cost you to go and buy the same pension income from another provider. In effect, they should be offering you apples for apples.
The main hold-up in the analysis of Final Scheme pension transfer is the UK provider missing one or two pieces of relevant information in a 30-50 page document. It is understandable as some schemes maybe 30 years old, but this can result in a bureaucratic circle of requesting the details again. That is why we complete all Letter of Authorities on behalf of our clients. It saves our clients time. Our pension team can spot any mistakes or omissions in the paperwork and request the correct information before they file the request away.
With record-high transfer values, obtaining your transfer value is advisable. You can complete our Letter of Authority electronically or by hand and return to us at the email in the header or directly to your Adviser.
There are a plethora of low-quality financial advice websites that offer final salary pension transfer calculators with pop-ups every time you move the cursor. In our opinion, these are best to avoid. The simple fact is that no-one knows the transfer value of your DB pension other than your UK scheme. They are the only people who can supply you with this information. Any calculations or estimates you receive from another 3rd party are a poor use of time.
After we have submitted your Letter of Authority, your pension scheme will complete their calculations and provide a transfer value along with all the necessary transfer out paperwork. This transfer value remains valid for 90 days, and all transfer out paperwork must be submitted before this value expires. If your CETV expires, we will need to request an additional valuation. Some providers charge up to £250 for additional CETVs within 12 months.
The FCA handbook confirms that advisory firms should “start by assuming that a transfer will not be suitable”. It protects investors as Financial Advisers must evidence that a transfer is indeed in the clients best interests. Otherwise, financial advice must suggest not to transfer. A client can be classed as an ‘insistent client’ and effectively go against the financial advice of the advisory firm, but these cases are usually more limited.
The FCA has further protected investors on defined benefit pension transfer advice. As per Section 48 of the Pension Schemes Act 2015 any DB pension with safeguarded benefits over £30,000, must include financial advice from firm regulated by the Financial Conduct Authority (FCA). It ensures any IFAs who are not authorised and regulated cannot advise clients on such important decisions. While this has added costs to the financial advice process, it is vital in protecting clients from poor advice. Before 2015, any unqualified Adviser could advise a client to transfer their DB pension benefits without any oversight from the FCA.
Seeking advice from a qualified and experienced Independent Financial Adviser is essential. The underlying calculations for assessing whether a transfer is in your interests are relatively complex, and this is not an area of advice anyone can give. A final salary pension transfer specialist is regulated and authorised to provide this advice and has passed the necessary examinations. Taking advice from anyone other than a defined benefit pension transfer specialist is a waste of time and money. Your UK pension scheme will request proof that the Adviser is authorised either way. They will be out of their depth so their advice may be unhelpful or misleading.
At Cameron James, we believe a substantial conflict of interest exists if the company approving the FCA sign-off is also the company that the client selects to transfer their pension. As ultimately, it is in the company’s interest in the sign-off to be approved and transfer to proceed as they will gain a new client and increase their income.
All DB pension transfers at Cameron James are completed by an independent FCA Financial Adviser who is paid a fixed fee for the advice. The fixed fee ensures the FCA Adviser provides a neutral and unbiased assessment on whether the DB transfer is in the clients best interests.
We would advise caution where the Financial Adviser providing the FCA sign-off is also the same Adviser who is set to gain from the transfer taking place. Additionally, the fixed cost of an FCA sign-off report is currently £2,300. It would be best if you treated any Financial Adviser that is offering you an FCA sign-off for ‘free’ with caution. It is doubtful that they are going to pay £2,300 out of their pocket for a high-quality report. Moreover, they may find the lowest possible cost report which would potentially compromise the quality of the advice.
While you may not be an investment expert, you are the only person who knows your goals and objectives. Where you plan to retire, your retirement income, and if you will be helping your children with an MSc, MBA or housing deposit shortly. This information is crucial in ensuring your portfolio is in-line with your requirements. Clients have told us that no-one had contacted them from their DB scheme to ask these types of questions in over 20-30 years.
That is the difference between large UK pensions and Cameron James. Your DB pension may represent a significant proportion of your retirement funds and ensuring it is well maintained should be a priority. Additionally, your financial landscape can change. You may find yourself needing to guard your pension and minimise your exposure to risk.
In contrast, you may have sold a business or inherited money. Therefore, you might want to take a higher level of risk on your DB pension to achieve higher long term growth. Pensions are a personal matter. This personalisation of service is missing in DB schemes.
The FCA has strict rules for financial advice on DB schemes Section 48 of the Pension Schemes Act 2015. The fixed fee for FCA sign-off with Cameron James is £2,300. This sign-off is completed independently of Cameron James by an FCA regulated and authorised Adviser who assesses the credibility of transferring your defined benefit policy. Their report will confirm whether a transfer is in your interest or not in your interest.
In instances where a transfer is not in your interest, we have a stop-gap in place with the FCA Adviser for them to cease any further work on the case at an earlier stage. It means our clients will never be charged more than £750 if the advice will be not to proceed.
If a transfer is in your interest, a transparent set-up fee of 1-3% applies. It depends on the size of your pension transfer. Economies of scale might apply for larger cases. This fee is deducted from the pension value upon transfer. Moreover, you will not have to pay it from your funds which are the most tax-efficient way for our clients. View a full breakdown on Our Costs Page.
That is one of the core benefits of transferring your DB scheme. The full 100% of your pension passes to your named beneficiaries. When completing your transfer pack our Financial Advisers will ask whom you wish to nominate as your beneficiaries.
Clients typically choose their spouse (100%) or sometimes their spouse (50%), son (25%) and daughter (25%) depending on the age of their children. You are free to breakdown your beneficiaries, however, you wish, and it can also include friends and relatives.
Your beneficiaries can also be changed at any time if your relationship or family situation changes. You only need to fill one form, and your beneficiaries will be updated accordingly. If you have formed a long-standing relationship with one of our Advisers, they are well placed to continue advising your family in line with your wishes. Alternatively, your family can move the investment to another Adviser of their choice or withdraw the capital.
For some clients, the offered transfer value is too good to refuse, and it is in their interest to accept it. For others – benefits outweigh the guarantee of income for life. Either way, it is their choice depending on a specific situation. In other cases, it is evident that a transfer is not in their interest, and we advise them as such.
Whatever your situation seeking high-quality advice on your DB pension transfer is essential. Mainly because you cannot go back once you have made that decision, so you need to be as informed as possible. Finally, with transfer values at record highs, obtaining your transfer value is prudent advice.
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