Pensions should be a straightforward issue. They offer many benefits, notably an income during old age. But the route to getting to that stage is often complex. This is especially true when reviewing a Defined Benefit (DB) pension plan.
A common quandary for holders of a DB pension is whether to transfer out and convert to a “Money Purchase” arrangement, where benefits can be taken in a more flexible way through “Income Drawdown”.
Transfer values of DB pensions can be extremely attractive but it is important to also consider that you are giving up a guaranteed income for life. This is one of the reasons why the Financial Conduct Authority, the UK financial regulator, insists that anyone thinking about transferring out of a DB pension (where the transfer value is above £30,000) must seek independent financial advice (note that the regulator cautions it is not generally in people’s interests to exchange their DB pension rights for a cash alternative).
DB pensions can be quite rigid regarding when a person is able to retire. For those wishing to start their retirement early (or maybe move to part-time work and use their pension to supplement their income) an income drawdown arrangement can offer greater flexibility.
Health is also a major factor in deciding whether to convert your DB scheme to a Money Purchase arrangement. If you are in poor health there is a risk that the guaranteed income will cease upon your demise; whereas converting this benefit and investing the cash could mean there will be more money to pass on to your loved ones.
While many people don’t want the responsibility, or have the know-how, to make the investment decisions involved in managing a pension, others want to have more control over how their cash is invested as well as how and when they take their income.
Not everyone wants the fixed income that a DB pension provides. They may want to withdraw more income in the earlier years of their retirement as they plan to travel more while still young enough to do so. A fixed income benefit as offered by DB schemes may not offer the flexibility to do this.
Or you may want a mix between a guaranteed income with some additional flexibility. This can be achieved with careful planning.
Money Purchase pensions also offer more flexibility in terms of inheritance tax planning or the ability to pass on death benefits to grown-up children. This is even more relevant now that the lifetime saving limit for pensions has been abolished.
Due to the high standard of professional qualifications needed and the actions of the regulator and Professional Indemnity insurers, there are now very few companies that can provide specific help and advice on this issue. To help with this REALM has partnered with a large national firm offering a robust and client-focused process that allows for the highest level of financial advice.
We particularly like the fact that they offer three, key stages of advice:
1. Triage – this is a free service where generic information is provided to help a person understand whether they want to investigate further transferring their pension. Not all companies offer a free service, which is one of the reasons we chose to partner with this firm.
2. Abridged Advice – this is also a free service that follows on from Triage, whereby a person’s personal circumstances will be assessed including some of the details of their existing pension scheme. A report will then be provided where the outcome either states that the pension should be left where it is, or that further investigation is required to establish the suitability of transferring it. This is another valuable option that allows you to weigh up the benefits of transferring before having to pay a fee.
3. Full Advice – this service is subject to a fee and will only happen if the person chooses to proceed beyond Abridged Advice. A full analysis of the options is provided, as well as a final written recommendation. It is worth noting that, based on our research, their fees are very reasonable and present good value in comparison to other advisory firms operating in this area.
Should you know of anyone, a friend or family member, who has worked for a large employer and has accrued a DB pension scheme over many years, you might want to pass on this information, especially if they are nearing retirement.
Please do not hesitate to call us to discuss on 020 3966 2749 or book a chat here.
