Occupational Pension Transfer Advice


Defined Benefit pension schemes were once considered the untouchable gold-standard of pensions in the UK. In recent years most, if not all, private sector employers have closed their schemes to new members, and placed restrictions on existing members.

Some have converted their Final Salary Defined Benefit schemes, which provide a pension based on the employee’s salary in their final year of employment, to less valuable Career Average Defined Benefit schemes, which base the pension on the employee’s salary averaged out over their career.

Why have they fallen out of favour?

The main reason is the cost. It was not unheard of in the past for a Final Salary scheme member to get a big pay rise in their final year of employment and then retire with a “gold-plated” final salary pension.
Many schemes ran into financial difficulty and had large deficits. Put simply, such schemes had insufficient assets to pay future scheme liabilities (i.e. Scheme members’ pensions) and employers who were themselves in financial trouble could not afford to make additional contributions into their schemes or transfer assets into them.

A spate of troubled final salary schemes led to the creation of the Pension Protection Fund in April 2005 following a public outcry that some Scheme members could lose some or all of their pensions if a Scheme was underfunded.

Whilst there are now more protections and rules in place than previously, these troubles have not gone away and many Schemes remain in deficit. A high profile recent example is the collapse of high street retailer BHS which left a massive and underfunded pension Scheme behind in its wake.

So should I transfer my Defined Benefit scheme?

There are many reasons for and against transferring out of Defined Benefit schemes (see table below), which will depend entirely on your individual circumstances, objectives, and the financial position of the pension Scheme.

Our default starting position is always that unless there are compelling reasons in favour of a transfer, that most transfers out of a Defined Benefit scheme are unsuitable.

Since the advent of Pension Freedoms in April 2015, there has been renewed interest in transfer from private sector and funded public sector Defined Benefit schemes, due to the attractiveness of some of the new rules, for example being able to pass pension funds on tax-free on death, and the ability to take as much or as little income and/or capital as one chooses.

What services do Cambrian offer?

We have specialist financial advisers who hold qualifications in pension transfer advice (AF3 or its predecessor G60) who can advise you whether a transfer out of a Defined Benefit scheme is suitable or not.
In all cases we will complete a questionnaire with you to ascertain your reasons for considering a transfer and your attitudes for example towards investment risk and guarantees. We will also send a questionnaire to your pension Scheme to obtain full details of Scheme benefits and its financial position.

If you are approaching retirement, we will produce a Transfer Value Analysis (TVAS) report using our specialist pension transfer software, which will determine the Critical Yield (i.e. the investment growth) that would be required until your Normal Retirement Date to produce a fund which could purchase benefits equal to those under your Defined Benefit scheme. We will also consider other factors such as the financial position of the Scheme, death benefits and the other sources of income you will have in retirement.

If you are at, or very close, to your Normal Retirement Age we would not completed a Transfer Value Analysis (TVAS) but we would consider what benefits you will be giving up compared to the benefits you will receive by transferring, whether a transfer is suitable given your circumstances and objectives and whether your income will be sustainable in retirement.

When we have completed our analysis and research we will present you with a Financial Planning Report which will contain our recommendations.

Table: Defined Benefit vs Defined Contribution

Defined Benefit

Defined Contribution/Money Purchase

Advantages

  • Guaranteed, inflation-proofed income for life.
  • No investment risk
  • Protection via the Pension Protection Fund if the Scheme goes bust
  • Spouse’s pension on death, typically 50% of the full pension

Advantages

  • Freedom to choose one of a number of income options from age 55 including conventional, enhanced and flexible annuities, Flexi-Access Drawdown, and Uncrystallised Pension Funds Lump Sum (UFPLS)
  • Since Pension Freedoms in 2015, no limit to how much income can be taken from the fund
  • Fund can remain invested and continue to grow in retirement
  • Fund can be passed on to spouse, dependent or nominee on death (tax-free before age 75), taken as lump sum or as income

Disadvantages

  • Inflexible – Income cannot be changed once the pension is in payment
  • If you want to take the Tax Free Cash only, you also have to take the income
  • Normally have poor lump sum death benefits
  • Risk of an employer/Scheme becoming insolvent and not being able to provide Scheme benefits in which case, it may be transferred to the Pension Protection Fund, where benefits may be reduced/capped, and transfers out blocked

Disadvantages

  • If guaranteed income is required, annuities can be poor value for money and may not match benefits from a transferred final salary scheme
  • Investment risk. If remaining invested, fund will be subject to volatility and capital may be depleted in lifetime particularly if drawing income and/or capital
  • Charges and fees associates with ongoing management of funds and requirement for regular reviews