Considering a pension transfer? What you need to consider.
Why look at a transfer now?
• Transfer values are inversely proportional to the income available from UK government bonds (gilt yields), so as gilts yields are at long term lows, transfer values are at long term highs. Transfer values will fall again if/when gilt yields and interest rates start to rise. Clearly if you are going to forgo a guaranteed income you need to get as much money in exchange for it as possible, current values offer a pretty attractive swap and won’t last for ever.
• The new flexible drawdown pension rules introduced in the 2014 budget, due to come into effect after April 2015, will create a massive difference between the options to vary income and create family capital from a personal pension compared to a fixed final salary pension.
• Recognising that these rule changes make transferring out more attractive, the Government has flagged the possibility of banning transfers in future if they are seen as destabilising the economy.
Who will likely benefit from a transfer?
• Someone who understands and is comfortable with the extra responsibilities and risks taken on when you switch a fixed income that gets paid without effort to an invested account that needs managing, carries risks and requires some ongoing maintenance.
• Someone attracted to getting a very different ‘shape’ of benefits from an invested account versus the lifetime income. This usually means extracting more value earlier on in life at the expense of income later in life. This can be a good trade off when combined with a sensible alternative plan for long term security.
• Someone with a big enough transfer value, or other income generating investments that they can withstand a degree of risk to future income.
How do I find out about my transfer and decide what to do?
• Transfer values only apply to those who have left, or are about to leave a scheme and have yet to draw their pension. You can’t transfer out once you are in receipt of a pension.
• To get your transfer value you need to contact your old employer’s pension scheme administrators. They generally take four to six weeks to arrive, but may take longer at present as administrators are receiving high levels of requests. You are entitled to obtain a transfer value on a free of charge basis at least once a year.
• The transfer value offered to you will usually be valid for three months giving you time to decide what to do.
• The decision to take a transfer value is both complex and irreversible, it’s therefore important to take advice from an appropriately qualified adviser. Advisers require special permissions from FCA to advise on final salary transfers, so not all advisers will be able to do this.
What advice do I need?
• You need to fully understand the benefits you will leave behind and open to you from a personal pension account so that you can decide what suits you best. This will include thinking about spouse benefits, cash options, early and late retirement options and the new flexible drawdown rules.
• You need to see whether the transfer value is attractive relative to what you give up, this is known as a ‘critical yield’ calculation and tells you what you will need to earn as an investment return on a personal pension to get better value for money than staying in the scheme.
• You need to understand all the risks implicit in both options.
• Above all you need a plan as to what you will do with the transfer value if you take it. This includes:
o Choosing a personal pension provider
o Deciding when to make withdrawals of cash and income
o Selecting investments for your pension account or appointing an investment manager to do this for you
James Baxter is a managing partner, Tideway Investment Partners. Contact him at James.firstname.lastname@example.org.