Pension firms issue warning to savers over transfers
SAVERS will now be warned before making risky pension transfers.
Anyone who decides to transfer out of final-salary pots at present faces volatile stock markets and could lose tens of thousands of pounds.
To prevent people from losing out, anyone who wants to shift their money will now get a letter from their scheme stating that a transfer is unlikely to be in their best long-term interests.
Pension scheme trustees will warn savers of the risks during the pandemic and urge them to consider the decision carefully.
The warning letter will be signed by watchdog The Pensions Regulator (TPR) , the Financial Conduct Authority (FCA), and the Money and Pensions Service, which runs The Pensions Advisory Service.
Why transferring a final-salary pension could lose you thousands of pounds
Final salary pension schemes, also known as defined benefit schemes, give members a guaranteed income until they die.
If someone wants to move their money to a different scheme - they are offered something called an equivalent cash lump sum called a CETV - cash equivalent transfer value.
Sometimes the pension scheme will even offer incentives to transfer, which means you could get more than your pension is worth on paper. Often, this is a huge amount of money.
Final salary and defined contribution pensions explained
THERE are two main kinds of pensions savings schemes in the UK: defined benefit and defined contribution.
Defined benefit - also known as final salary - pension schemes give their members an income for life.
The amount you get is based on how much you earn, either looking at your salary when you retire or an average over your career.
These gold-plated pensions are rare now as most companies have stopped offering them to new staff.
This means that very few young people have access to final-salary schemes, although they are still fairly common in the public sector.
Mostly, they have been replaced with something called defined contribution pensions.
This is where you save a certain amount of money each month and it is invested in the stock market.
The government tops up the money through tax relief, and most savers get a contribution from their employer too.
But the final amount of money you end up with depends on how much you have saved and how well your investments have performed.
Government figures obtained by financial provider Royal London showed that in the 2018/19 tax year, £34billion was taken out of final salary schemes.
That year alone, 210,000 people transferred out with an average cash value of £161,907.
But if you take your cash out, you have to invest it in another kind of pension, which means you are directly exposed to the stock market.
You no longer have your guaranteed income (unless you later buy an annuity, which is likely to provide a lower income than your final salary payments) so how much you'll be able to take in retirement depends on how well your investments do.
This means that anyone who transfers is putting their money at risk.
There are checks in balances in place, and anyone wishing to transfer more than £30,000 legally has to take financial advice.
But investments are extremely volatile at the moment because of coronavirus and oil prices falling.
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In the first three months of this year, the FTSE 100 fell by 25 per cent.
If someone had transferred their final salary pension into a FTSE 100 tracker at the end of December, they might have lost £40,476 in this time period - a quarter of their lifetime savings.
Of course, investments might be diversified and protected from stock market falls to some extent.
But it shows the danger for retirees who move their money from the safety of defined benefit scheme where the income is guaranteed.
Stock markets will likely recover, but it may take some time.
Any retiree who needs to access cash in retirement will have to sell at a low point and crystallise those losses.
This is why the two pension watchdogs are warning people to think extremely carefully in the current climate.
When might it be a good idea to take a pension transfer?
The regulators say that in the majority of cases anyone with a final salary scheme is better off leaving their money where it is.
But there are a few scenarios where it might make sense to consider a transfer.
If you are in poor health and think you will not reach average life expectancy, you might want access your pension.
This is because the CETV is calculated with average life expectancy in mind so if you live fewer years than expected you'll have more cash each year.
Some people also want to transfer because of the flexibility.
Defined contribution savers can often take their cash earlier and can also vary the amount they take each year according to their needs.
Financial advice - what to expect
THE Money Advice Service has a full checklist on what to expect from a financial adviser on pension transfers:
They should:
- Discuss your personal circumstances and financial position with you, including the level of risk you feel comfortable with.
- Compare the benefits you might give up if you transfer out of your employer’s scheme with the benefits you might get if you transfer into a new employer’s scheme or a personal/stakeholder pension.
- Assess the level to which your employer’s pension scheme is funded, the risk that your benefits might be reduced and the effect on any transfer value offered.
- Check the difference between defined benefit and defined contribution arrangements.
- Give you a summary of the advantages and disadvantages of their recommendation.
- Ask whether you’ve discussed your decision with your spouse or civil partner as it probably affects them too.
- Check your full range of options.
Some people are also worried about the security of their employers (or former employers).
If the company you earned the pension with goes bust, it might not have the funds to pay what you are owed.
Fortunately, the Pension Protection Fund will give you some compensation, but you may lose a percentage of your income.
For instance, people who are below retirement age get compensation based on 90 per cent of what the pension was worth at the time the company went bust.
Because of this, some may wish to transfer their pension if they think there is a good chance an employer or former employer will go into insolvency.
But even if you have a good reason for transferring, your pension will still be at the mercy of the stock markets, so you need to think hard about whether it's the right decision.
Even if your CETV is less than £30,000 you should consider taking advice from a regulated financial adviser.
You can find an independent financial adviser using Unbiased.co.uk.
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