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Andrew Tully: Breaking the taboo on final salary pension transfers

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Transferring out of a final salary pension scheme has long been seen as a taboo by many in the industry. But the issue has been thrown into much greater focus since the pension freedoms were introduced. This is partly because many schemes are offering transfer values higher than the historical average but also as a result of customers finding the freedom in a defined contribution scheme attractive. This includes access to funds, flexibility over income and the ability to cascade unused funds down the generations after death.

The numbers of people looking into transferring out of final salary has surged over the past year or so but despite the obvious attractions of pension freedoms many are likely to be better staying put. Saying that, there are situations where a transfer will be appropriate advice, so it is important each case is judged on its own individual merits. For me, there are two distinct scenarios.

Some people have a deferred final salary benefit and are many years away from retirement. Here the critical yield is a key factor, as it helps indicate what kind of investment return is needed to match the benefits being given up. While there are always exceptions, in many cases the required yield will be too great. So, unless there are unique circumstances such as serious ill health, the downside risk means a transfer often will not be suitable. However, for those with substantial benefits, any weakness in the sponsoring employer’s ability to support the pension scheme is worth taking into account.

The situation for those transferring to take immediate benefits is different. In these cases a critical yield is a lesser factor or indeed irrelevant if the transfer is taking place at the scheme retirement date.

The FCA recognises this by not requiring an automated transfer value analysis in this situation.  The key in these circumstances is a comparison of the benefits being given up compared to  those available in the new arrangement.

“The ability for family to inherit the entire remaining pension fund free of inheritance tax is a strong driver for some”

There are a number of factors that could indicate a transfer may be suitable. The ability for family to inherit the entire remaining pension fund free of inheritance tax is a strong driver for some, compared with the often poor level of death benefits available for a final salary member.

In a similar vein, people who are single have the ability to re-shape death benefits to suit their individual circumstances, which is preferable to an irrelevant benefit automatically provided by the scheme. Final salary schemes also lack flexibility, so a transfer can give income flexibility and tax planning opportunities, allowing advisers to help clients control the amount of tax they pay.

Add in the potential for greater amounts of tax-free cash and possible health issues, and there are a range of reasons why a transfer may be worth exploring. However, the move from a defined retirement benefit to the uncertainties and risks inherent in income drawdown is a huge step.

This is where new hybrid solutions offering annuities and drawdown in one wrapper can help. The annuity element can produce a guaranteed income personalised to the client’s circumstances and take into account their health and lifestyle. This allows the adviser to match some or all of the guaranteed income the final salary scheme is providing and invest any excess money in the drawdown element, giving the client a level of certainty not available under a traditional drawdown solution.

A recent case that came across my desk allowed a client to use an annuity to match the guaranteed income offered by the final salary scheme and have around £80,000 left over in drawdown. That was driven by a combination of a generous transfer value, moderate health issues and a restructuring of death benefits from a joint life benefit to a 20-year guarantee.

Final salary transfers are increasingly on the radar and although there are risks for both advisers and their clients, there are certain situations where a transfer can be the right decision. Any adviser practising in this area will know to tread carefully; however, great client outcomes can be delivered in the right circumstances.

Andrew Tully is pensions technical director at Retirement Advantage



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There are 21 comments at the moment, we would love to hear your opinion too.

  1. So, I have to sit down, was that actually a sensible article on the merits of giving individual advice based on customers circumstances rather than 20 year old perceptions and fear of the repercussions of even thinking about advising on pension freedoms instead of final salaries. More please!!!

  2. It is interesting that the “key driver” of those seeking DB transfer advice through my office has indeed been the “inheritability” of the DC pot, should the transfer proceed. The majority of my clients where DB transfers have taken place are in the fortunate position where the pension pot is not the most significant retirement income source they have, but part of an overall “blended” suite of in-retirement assets. I would be interested to know if my peers have found similar situations.

  3. John Stimpson 16th May 2016 at 6:00 pm

    Spot on, great article.

  4. A very sensible, well written, article. I have one small issue… Although the FCA don’t require a TVAS at normal retirement age, most DB schemes won’t allow a transfer in the 12 months up to normal retirement age! Go figure…

  5. Inheritability, apart from those in extreme ill health (where IHT may well apply anyway) is a non-reason. Life insurance is invariably cheaper, and in the long-term (decades) why would children need the inheritance when they themselves may well be in (or near) retirement?

    • I don’t agree inheritability and subsequent tax treatment of inherited death benefits can be dismissed. And although IHT may indeed apply where member is in ill-health at time of transfer and dies within 2 years, the transfer of value for IHT purposes will often be nil due to the method of calculation.

    • I can only hope you are not active in giving DB advise.

      I think you would find that if most parents could potentially pass on a large tax efficient lump sum to their children in the event of death, even if the children will be near retirement, would feature high up the list of objectives.

      And again, who is to say that the children will be the beneficiaries of the death benefits? The new pension freedoms offer greater flexibility for passing funds to whomever you like.

      I think you also miss the point as to who would be eligible for a dependants pension in the event of death – what if you have an aunt who wants her niece and nephew to benefit in a tax efficient manner in the event of her death? Just cause an insurance policy is “cheaper” doesn’t mean its the right advice.

      I think you may need to remember that DB transfer advise is a full holistic piece of advice and that a misinformed decision not to transfer is equally as bad as a misinformed decision to transfer.

      The point is that the decision must be made based on a number of factors rather than just critical yield alone.

  6. We have just about everything from poor health, divorcees, paying off debts, starting new businesses, intergenerational benefits, moving overseas, buying first property (yep even at 60). maybe we should start a linkedin group or something to start examining actual situations and cases to get some consistency across the industry?

  7. Philip Hodges 17th May 2016 at 1:11 pm

    I agree with the article. The problem is going to be finding enough advisers to provide the advice that is essential for the tens of thousands retiring from DB schemes each year.
    Currently such advice is seen as too expensive for many. There is a need to use more streamlined ways to cover evaluating the fair value of the transfer and the wider advice process.

  8. Whilst they have never published it I suspect that FOS has a table of “acceptable critical yields for different investment risk categories” It doesn’t matter if you or I think the advice is suitable or not FOS doesn’t have people who understand the subjective side of this type of advice or indeed have people who are pension transfer qualified/experienced

  9. Andrew Smurthwaite 18th May 2016 at 9:39 am

    In the new world of Pensions Freedoms, in fact even before the new regulations Andrew’s statement that “the critical yield is a key factor” in the decision making process is seriously flawed, as is the whole TVAS process for customers wanting to utilize income drawdown in retirement. Critical Yield calculations still target an annuity in retirement, that annuity uses gilt yields to calculate it’s rates (under FCA guidelines), there are customers who will never consider the purchase of an annuity and will maintain investment in the equity market for the rest of their lives.

  10. Just going throught he process myself I have a couple of comments. 1) Difficult to find a competatnt advisor. 2) The fact the Transfer value is only valid for 3 months which appears sufficient time is actually a really tight timescale when you factor Christmas in. 3) The TVAS report is really quite unhelpful as it is based around annuity rates which most people won’t use if they opt out. What would be more useful is a straight forward comparison with say the Pru at 55 and with taking 25% out of the Defined benefit scheme and the impact on the monthly pension, plus a comparison 60 with and without the 25%, but the defined benefit scheme I’m in won’t provide this information, so it is like taking a best guess, which in this day and age of financial regulation is unacceptable – the old companies running these Definied Benefit schemes need to be woken up a bit 4) Very few people have done this and so it is difficult to discuss with friends their experiences. 5) There is obviously an investment risk & ongoing high management costs around (1.5%pa) if you opt out which has the be weighed against the benefits of being able to pull 25% tax free out at 55 and then taking your actual pension then or say in a further 5 years time which is so flexible and everything can be left to your spouse or kids or chairy of your choice rather than evaporating if you die early. Apparently, French Pension providers have much lower annual chanrges and are about to break into the UK market 6) Would prefer someone like the Pru to come up with a guaranteed capital protected income and growth product for Pension Investment with a lower charging structure as a better way forward as this sector seems like it is need of an overhaul. Would be nice if someone in power could listen… but I doubt it, as this is such a first world issue!

  11. I have 2 deferred benefit arrangements – one when I left my company in 1985 after 8 years service and one which was stopped and replaced by a DC scheme (which I continue to subscribe to with max contributions by myself matched by generous ones by my present employers) in 2011 after 16 years. Incidentally they are a large financial FTSE top 100 company. I asked for transfer values on both the deferred pensions and have received very generous offers of multiples of just over 38 on both. Considering both are frozen at the salary I was earning in those respective years they stopped albeit with index linking which in recent years has been low (capped at 7.5% anyway) and the number of years ‘earned’ you can imagine the annual pension they offer is, to say the least, limited! I’ve also since discovered that an offer of 27 times the annual is a ‘normal’ level of offer so my company would seem to be offering way ave that. As I am 57 I can also release 25% tax free to invest (or spend!) as I see fit. My husband has never had a FSP and is now retired on a DC income drawdown arrangement – comfortable living (exceeding my FSP by some margin) with the funds replenishing well. My transfer value is equal if not better to his hard earned one so I see it as a no brainer particularly as like others have stated it becomes part of your estate. There must be many examples of people on smaller deferred FSPs like mine and to put fear in them of transferring is very bad advice as in the majority of cases where the offer is good it is the right thing to do – by far.

  12. Can anyone recommend a good advisor to provide the obligatory ‘advice’ as to whether a transfer from a final salary pension to a sipp is recommended. I am in a position where I have decided that I want to do this but am being forced to take advice.

    • Andrew – let me know if you are successful, as I have the same challenge, and preferably someone who charges a flat fee! Regards – John

    • Exactly my issue – My transfer value share of a pension sharing order is £492k which will enable home purchase with my new partner (yes I am one of the dispossessed at 62!) with my 25% TF now and potential for further growth over the next 5 years before I retire. However, many on-line portfolio providers flatly refuse to accept such transfers, others saying application via FAs only – Talk about mis-selling twitchy!
      So a rubber stamp is required (at a fee) to say they have told me what I want to tell them. Conversation 10 mins, at £500 p.h that still shouldn’t cost me more then £250. % rates can cost £3-5k for this ‘advice’!

      • Hi Phil, I find your article interesting as I am currently in the same position, I have a CETV fund of £490,000. I have found a local FA that has quoted me £7500 +vat but he also is pushing to advise and management this fund annually in drawdown and this will cost me 1.5% annually (£5500 pa).
        He has informed me that unless he is able to manage the £360k fund (after tax free deduction) he will not put his name to the transfer application forms. So I must decide am I willing to agree to 1.5% pa with no guarantees that his fund choices make an annual profit, if they do not then he will still requires the 1.5% (£5500 pa).

    • Andrew, I have my first appointment tomorrow with a DB transfer specialist £3500 flat fee.

  13. Hi Andrew, I am based in Dubai and some of the stories I here over in Dubai are terrible. The company I work for doesn’t use an expensive Bond wrap but most do because of high commissions. We only recommend multi strategy funds and charge between 2% and 4% for the set up. I transferred my final salary pension and much prefer the flexibility and option to structure my finances into retirement to pay as little tax as possible. The DTA between Dubai and Malta and now the UK helps ex pats.

  14. I find myself in a similar situation to many contributors to this thread:
    For the last 30 years, I have belonged to a defined-benefit, final salary-related pension scheme. My employer is in the process of changing this to a significantly less attractive Career Average Revalued Earnings arrangement.
    I could just accept the consequences (according to the company’s own figures, this would result in a loss of around £100K assuming I live for 20 years post-retirement). Alternatively, I could take the CETV (= 25 x forecast income in retirement) and invest it in my P2P SIPP which is operated on a fixed-fee basis (ie no additional charge for the hefty increase in funds invested). I’m minded to do this because I have been investing in P2P for several years with average returns in excess of 10%.
    The challenge I face is to find an IFA who is prepared to positively recommend the transfer (as required by the FCA
    I’d be interested to hear from IFAs who have the necessary qualifications and who (subject to assessment of my circumstances) would be prepared to positively recommend the proposed transfer (

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