Understand the main features of the defined benefits being given up and a money purchase arrangement.
A defined benefit pension scheme is a type of pension plan in which an employer promises a specified monthly benefit on retirement which is payable for the rest of your life no matter how long you live. The scheme is operated by the Trustee in accordance with the Trust Deed and Rules. The Trustee is primarily responsible for ensuring that the promised benefits are paid to members. This includes being responsible for the Investment policy and agreeing an appropriate contribution rate from the employer sufficient to fund the promised benefits plus the costs of running the scheme. All costs including administration costs, investment costs, legal fees and consultancy costs are met from the scheme and do not affect members benefits. The benefits are normally a pension for life payable from Normal Retirement Date generally with the option to take a tax free cash sum at retirement and a reduced annual pension. They would normally have valuable attaching benefits such as annual increases in the period from the date of leaving the scheme to the date of retirement as well as once the benefits come into payment. In addition there would normally be an attaching spouse’s pension payable to your spouse for the remainder of their life in the event of you predeceasing them. There may also be dependant’s pensions payable to children or other dependants.
By contrast a money purchase arrangement is a pot of money invested by the policyholder and used to provide benefits on retirement. This type of arrangement includes Personal Pensions (PP), Self Invested Personal Pensions (SIPP) and Small Self Administered Schemes (SSAS). The individual policyholder is responsible for the fund and would need to determine the investment policy which is likely involve regular reviews and advice. The policyholder is responsible for meeting all costs including administration fees and investment fees as well as fees for advice out of their benefit pot and hence these fees will impact on performance and ultimate benefits. At retirement the fund available can be used to purchase a pension payable for life or alternatively you have a range of flexible options for taking your pension including taking 25% of your fund as a tax free cash sum and drawing on the remainder as and when required. You would need to consider the likelihood and impact of running out of money should you live longer than anticipated. In the event of your death the remaining fund at the date of death would be payable as lump sum to your dependants in accordance with your wishes as set out in your completed nomination of beneficiaries form.
The Requirement for Independent Financial Advice
If the CETV is more than £30,000 then you are legally required to take Independent Financial Advice from a suitable Advisor authorised by the Financial Conduct Authority (FCA). Not all advisors are authorised to provide advice on this type of transfer.
It is important that you understand the process and the fees involved in you obtaining this advice. Your employer or scheme may have provision for meeting part of the fees for limited advice but this is by no means universal.
FCA Guidelines
In giving the advice the advisor must follow the current rules and guidelines issued by the FCA. These guidelines set out the default position which is that the Advisor should assume that a transfer will not be suitable. The Advisor can only recommend a transfer where it can clearly be demonstrated that the transfer is in your best interests.
Considerations
In order to demonstrate that the transfer is in your best interests the following will need to be taken into account
• Your intentions for accessing your benefits and your retirement objectives
• Your attitude to and understanding of the risk of giving up known safeguarded benefits for flexible benefits
• Your attitude to and understanding of investment risk
• Your realistic retirement income and lump sum needs including
• How they can be achieved
• The role played by the safeguarded benefits in achieving this
• The impact of a transfer on those needs
• Alternative ways of achieving your objectives without a transfer.
Information Required
As part of the process you will need to provide detailed information as follows:
• Full financial information for you and your spouse/ partner including current income and expenditure both essential and discretionary, details of investments, savings, loans and all other pension arrangements including a state pension forecast for both of you.
• Details of anyone financially dependent on you
• Full details of any protection life cover critical illness cover etc
• Details of your will and wishes regarding inheritance
• Your intentions for accessing your retirement benefits and your objectives for retirement
• Your attitude to and understanding of the risk of giving up safeguarded benefits for flexible benefits and whether this is likely to change as you age
• Your attitude to and your understanding of investment risk and whether this is likely to change as you age
• Your realistic assessment of your retirement income needs including discretionary spending such as holidays weddings cars etc and how this can be achieved
Process
You are likely to need a number of meetings with your Advisor initially to gather the information needed and discuss your objectives and later to go through the detailed reports giving the advice checking your understanding and agreement and eventual sign off.
• Information has to be gathered from you
• Information has to be gathered from the defined benefit scheme and analysed
• Additional information may need to be sought
• The reports have to be prepared and meetings arranged
• The whole process is likely to take at least 8 weeks for providing the advice and longer to implement the transfer.
• CETV quotations issued by defined benefit schemes are normally only valid for three months.
• A request for a revised CETV quotation within a 12 month period of a previous quotation is likely to incur a fee of several hundred pounds charged by the scheme trustee.
Summary
Transfers from a defined benefit or safeguarded pension arrangement are not likely to be suitable for everyone. Independent advice is mandatory and must demonstrate that the transfer is clearly in the member’s best interest for it to go ahead. Such advice involves detailed information from both the member and the scheme and comprehensive reports from the Advisor. The whole process is likely to take a minimum of 8 weeks and must be completed within the guarantee period of the CETV quotation. The fees for such advice are likely to be substantial.
Nevertheless such a transfer can be right for some people depending very much on their particular circumstances and objectives.
