10th September 2018
According to the Pensions Regulator in the year to March 2018 some 100,000 people transferred their pensions out of their defined benefit pension schemes. Now whilst a transfer from a defined benefit (DB) scheme may be appropriate in certain circumstances as the regulator commented “transfers from DB schemes to Defined Contribution (DC) schemes are unlikely to be in the best interests of most members.”
In fact so concerned are the regulators with the rate of transfer that in March 2018 they issued revised guidance in respect of defined benefit transfers. They have also written to the trustees of a number of schemes warning them about the potential for members to be targeted by firms looking to transfer pensions out of defined benefit schemes.
So why is there such a level of concern in respect of pension transfers? To understand that it is perhaps worth looking first at the key features of defined benefit pensions. Otherwise known as final salary schemes, defined benefit pension schemes are set up to pay out a fixed amount every year upon retirement; with that amount depending on a number of factors including retirement age and length of service. Benefits built into the scheme generally include an indexation allowance and a guaranteed spouse benefit upon the death of the pension holder. Defined benefit schemes are also covered by the pension protection fund which provides a level of cover in the event of insufficient funds being held in the main scheme.
Transferring to a defined contribution scheme means losing all of those benefits and protections and instead relying on the investment return of the new plan. That is one reason why regulations which come into force from 1 October will require advisers to provide a Transfer Value Comparator (TVC). This will indicate the value of benefits being given up and the cost of purchasing the same level of benefit and income within a defined contribution environment.
As mentioned above the regulator does acknowledge that in some circumstances a transfer to a defined contribution scheme may be appropriate. For example defined contribution schemes can be passed on to a non-dependent beneficiary on death and potentially there may be more tax free cash available to drawdown.
Transferring your DB pension is a big decision and an irreversible one, so it is important to get professional advice to fully understand exactly what this means for your individual situation, and what the pros and cons for you might be before making any final decision.
Neil Sear, Director of Thompson Jenner Financial Services, has the necessary qualifications and has been authorised by the regulator to give advice on Defined Benefits transfers. The firm will only give advice once they have obtained a Transfer Value Analysis System report from and independent third party, which breaks down all the benefits of the old scheme and compares them to a new DC scheme.
Neil commented, “the steps taken by the regulator earlier this year have been designed to ensure that those providing regulated financial advice fully consider the client’s circumstances and properly consider the various options available to them.”’ For that reason Thompson Jenner Financial Services will not participate in execution only cases or advise on scheme transfers where we have no participation in the advice regarding the new investment.
If you would like to find out more or meet to discuss DB pensions or the financial services which we are able to provide, please contact Neil Sear at either our Exeter or Exmouth office on 01392 258553 or 01395 279521 to arrange a free initial meeting.
