I am 50 years-old and currently have two pensions. One is a defined benefit pension, which is deferred, and linked to my wage, though is not being contributed to. The current value is £28,000 a year at age 67.
The second is a defined contribution scheme, which when my employer stopped the defined benefit scheme it made additional payments into in the beginning.
Currently, they pay in 12 per cent, and I am paying 20 per cent of my wage with a pot value currently at £70,000.
Retirement planning: Why are financial advisers trying to charge me so much to transfer my defined benefit pension?
I would like to retire early at around 56. With the defined benefit scheme, this would provide me with a early retirement pension of £21,000 a year, and I would have a defined contribution pot, if it grows well, of around £250,000.
I have been looking into cashing in the defined benefit pension. The transfer value would be in the region of £800,000, which then can be used as a defined contribution pension.
I am confused when talking to financial advisers about a transfer, as their fees and costs seem to be high, both for the transfer and ongoing costs.
Are there any other ways the defined benefit pension can be transferred, or can it be utilised in a different way?
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Steve Webb replies: People with traditional salary-related or ‘defined benefit’ pensions are finding it increasingly difficult to find financial advice if they want to consider transferring it into a pot of money or ‘defined contribution’ pension.
As you know, financial advice is mandatory for anyone looking at a transfer value of over £30,000.
I agree that more needs to be done to make sure that affordable advice is available.
I should however stress at the start that the two regulators involved – the Pensions Regulator (which oversees company pension schemes) and the Financial Conduct Authority (which regulates financial advice) – agree that for most people staying in a defined benefit pension is the best thing to do.
Steve Webb: Find out how to ask the former Pensions Minister a question about your retirement savings in the box below
In a DB scheme pretty much all of the risk falls on the sponsoring employer rather than the member.
If scheme investments perform badly, it is the employer which has to make up any shortfall. If inflation is higher than expected, it is the employer who has to fund the higher pensions. And if members live longer than expected, it is the employer who has to provide extra funding.
If you switch to a DC pension, all of these risks fall on you.
Where do your pensions stand at present?
I obviously cannot give you financial advice, as I’m not authorised to do so and as I don’t know your full circumstances, but I can’t help noticing that you have what many people would regard as a very good pension position as things stand.
You have a secure core income from your DB pension, and you have the flexibility to take it early if you wish, and you expect to have a meaningful DC pot which will give you further flexibility, especially in the period before your state pension kicks in.
You should however be aware that for most DC pensions the minimum age of access will rise to 57 by April 2028, so you the exact timing of your retirement could affect whether you can have immediate access to your DC pension pot when you retire or have to wait until you are 57.
Why is it hard to get affordable advice on DB pension transfers?
On financial advice, what has happened recently is that regulators have clamped down to try to drive poor quality advice firms out of the market.
There have also been high profile examples of schemes where large numbers of members were apparently given poor advice and many are now seeking compensation from their advisers or from industry-wide compensation schemes.
A consequence of this is that the ‘professional indemnity’ insurers who stand behind advice firms have hiked their costs and restricted their cover.
Some advice networks will only agree to recommend a transfer if you transfer the money to the in-house funds which they offer. This gives them an additional stream of revenue on top of advice costs
This has further reduced the supply of firms willing to act and has increased the cost of providing advice.
One way that some firms try to get round this problem is by making some of their money from ongoing charges after you have transferred, and this seems to be what you have encountered.
It is no longer allowable to offer ‘free’ advice, with payment only made if a transfer takes place, but advisers can keep the cost of advice down by subsidising it out of the profits they can make by what happens after a transfer.
What fees might financial advisers charge?
It is important to distinguish two types of charges you might face if you were to transfer.
One is the cost of ongoing financial advice.
In your scenario you could be talking about a transfer value plus DC pot totalling over £1million, and you are likely to have to manage this pot for a period of around three decades.
Unless you are an experienced investor, the chances are that you will need advice to do this well, both to avoid running out of money on the one hand but also to avoid being excessively prudent on the other.
Ongoing financial advice can help you with this and may be a good investment.
A second sort of post-transfer cost is more questionable.
Some advice networks will only agree to recommend a transfer if you transfer the money to the in-house funds which they offer.
This gives them an additional stream of revenue on top of advice costs.
These advice networks will argue that these products are good value and carefully chosen, but you can often get something similar and a lot cheaper if you shop around.
If you cannot find an adviser who will offer affordable advice, you could sign up with a firm who will transfer your money into their own funds, but then review post-transfer whether moving them to a broadly similar investment but provided more cheaply elsewhere would be an option.
However, you need to check before going ahead that there aren’t ‘lock-in’ rules or financial penalties for people who move their money out of in-house funds post transfer.
Might your DB pension scheme offer you more suitable terms?
You asked about flexibilities within your DB scheme and this is well worth exploring. You already know you can take your pension early, albeit at a reduced rate.
But some DB schemes offer what are called ‘bridging pensions’ where you actually get a higher pension early in your retirement followed by a drop when your state pension cuts in.
Other DB schemes will offer you the chance to exchange some of your future inflation increases for a higher starting pension, a process known as a PIE or a ‘Pension Increase Exchange’.
I would strongly encourage you to talk to your DB scheme before going any further.
Growing numbers of schemes will have an appointed independent financial adviser who can help advise on transfers and wider matters, and this will often be a good value option.
How do you find a decent financial adviser?
Finally, people often remark that it is very hard to know whether any particular adviser will do a good job.
For pension transfer advice specifically, one thing you might look out for is the pension transfer ‘Gold Standard’ certification run by the Personal Finance Society.
Although this is based on self-certification, in general you should find that advisers who have signed up to the principles of the Gold Standard should offer good quality, client-focused advice.
You can read more about this scheme here.
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