Do you require final salary pension transfer advice?
Following the introduction of pension freedoms in April 2015 the FCA introduced new legislation concerning final salary pension transfers. The new requirement states that where the cash equivalent transfer value of your benefits in any scheme are greater than £30,000, you must obtain appropriate advice from a UK regulated pension transfer specialist before you will be permitted to transfer to a scheme with flexible benefits.
Final salary pension transfers explained
A final salary pension transfer will involve your scheme trustees calculating what is known as the ‘cash equivalent transfer value’ or CETV for short. This represents the capitalised value of your benefits in the scheme and is calculated using a set of guidelines and assumptions. These include:
- The level of pension that you had built up in the scheme before you left.
- The scheme rules that dictate how much your pension will increase between leaving the scheme and retirement; the level of increase in retirement; and any spouse’s benefits or guarantee periods.
- Any discretionary benefits that you are entitled to within the scheme.
- How far away from the scheme’s retirement age you are.
- The discount rate; this involves estimating the future returns that can be expected from the funds set aside to provide your pension benefit.
- Assumptions relating to the annuity rate at retirement.
- How long you might be expected to live.
Final salary pension transfers are available to deferred members (those who have left the scheme but are yet to draw their pension) and to employees who have reached the scheme retirement age. They can also be offered as part of an early retirement or redundancy package.
All deferred members have a statutory right to transfer except in the following cases:
- You are a deferred member of an unfunded public sector scheme such as the NHS scheme, teachers’, police or military service schemes. The option to transfer from these types of schemes has now been closed by the government.
- You are within one year of your scheme’s normal retirement age. In this case the option to transfer is at the discretion of the trustees; this is also the case for members that have passed their scheme retirement age without commencing benefits.
In all cases the option to transfer is lost as soon you have started to receive your pension benefits.
Accepting the transfer of risk and the loss of fixed benefits
Within a final salary scheme the pension income that you receive at retirement is fixed and guaranteed by your employer, or in some cases the liabilities can be sold on to an insurance company who then take responsibility for the guarantees. These safeguarded benefits are payable for life and also include annual increases which provide valuable protection against inflation. The longer you and/or your spouse live the greater the benefit you will have received from the scheme.
When you accept a transfer value and invest the money in a personal pension the investment risk will have been transferred from the scheme to yourself. The returns that are achieved will be dependent upon the investment returns that can be generated from the funds or assets that you invest in. If the fund does well then you may end up with more net cash from the transfer value, however if the investment returns are poor you could have significantly less; with longevity comes the risk that you may have to reduce your pension income or worse still – that the fund could eventually run out.
Once you have accepted a transfer value you will be discharged from the scheme and the transaction is irreversible. Making such a decision requires careful consideration and professional advice before proceeding.
First Equitable’s final salary pension transfer service
- Free initial assessment – A free initial consultation is provided to discuss the likely suitability of a transfer given your personal circumstances and objectives. If you haven’t done so already, we will contact your scheme to obtain the cash equivalent transfer value and provide an initial assessment as to how generous we believe the transfer value being offered is. The initial assessment can be completed over the phone, using video conferencing or by meeting in person.
- Comprehensive report and analysis – For clients that would like to take it further we will provide a comprehensive suitability report and recommendation. This will involve completing a full fact find and risk profile questionnaire with you. We will look in detail at your needs and circumstances and the benefits you have in your existing scheme. A detailed report will follow, including a critical yield analysis (also known as a TVAS report) that calculates the investment return required, after costs are accounted for, for the new scheme to match the benefits being given up at retirement under the existing scheme. First Equitable charges a fixed fee of £1450 for this service and the fee is payable whether our advice is to transfer or remain in the scheme; this ensures you can be certain you are receiving fully impartial advice from a pension transfer specialist as to the best recommended course of action for you. This will satisfy the FCA’s requirement to take specialist advice for those with transfer values greater than £30,000.
- Administering the transfer – If following our analysis it is deemed suitable and appropriate for you to transfer, an implementation fee of £950 will be payable. We will then assist you to complete the paperwork with the ceding scheme and the administration involved with the opening of the new scheme. Clients should be aware that the time taken to compete the transfer can vary greatly from scheme to scheme and is typically between 1 and 3 months.
- Ongoing Advice – When your transfer is complete First Equitable can provide the option of ongoing services and advice for those clients that would like their investments managed professionally on their behalf.