Want to do the unspeakable deed? The following guest post by Auld Tattie Bogle, a Monevator reader, explains that it even if you’re convinced it’s right for you, it might not be so easy to transfer a final salary pension.
I have almost reached my half-century, and along the way I have enjoyed a fairly long career in IT with a variety of different employers.
This scenic route through the workplace had resulted in me acquiring several relatively small pensions.
Most were defined contribution schemes. But one was a defined benefits scheme.
Following the pension freedoms [1] that came into effect on 6 April 2015, many people may have been tempted to transfer money from such defined benefits scheme – also known as final salary pensions – into a more flexible money purchase scheme, also known as a defined contributions scheme.
Now for most people, undertaking such a transfer is likely to be a bad idea. This is because a final salary scheme guarantees a certain level of income in retirement risk-free, provided the scheme doesn’t go bust.
Worse, for a significant minority a transfer could present crooks with a great opportunity to defraud them out of a large portion of their pension savings.
So let’s be careful out there!
Yet despite these risks, I decided to transfer my sole small-sized defined benefits pension pot into my primary SIPP.
As things turned out, making this difficult decision was the easy bit. Actually getting the transfer done was the real challenge!
I thought I would share the logic behind my decision and my experience in case others find themselves in a similar situation.
One pension pot to rule them all
Some years ago I decided to consolidate the money from all of my previous defined contributions schemes into my employer’s scheme.
However I had hitherto left my defined benefits scheme alone.
Received wisdom was that these schemes were valuable, increasingly rare and the gold standard for pensions that shouldn’t be messed with.
But as time passed I became increasingly curious about the possibility of cashing in this defined benefits scheme and transferring it into my SIPP.
As I mentioned, I knew making such a move would be very much counter to the standard advice.
Why then did I do it?
Here are the main reasons I decided that transferring my defined benefits scheme into my SIPP was a sensible course of action for me:
- I am not convinced that defined benefits schemes benefit ‘deferred’ members with short periods of employment.
- My defined benefits scheme was a very small percentage of my overall pension provision (around 10%).
- I plan to retire early [2].
- I plan to take a tax-free lump sum.
- I plan to use flexible drawdown [3] rather than to purchase an annuity.
- My wife’s primary pension is a defined benefits scheme, so between us we would still be covering the bases.
- I like the idea of having visibility of all my pension funds in one place. (Sad I know!)
Decision defined
I ought to explain my thought process behind the first bullet point above.
Final salary schemes benefit most those members whose salaries increase over their careers.
This is because a member’s final salary at retirement can be far higher than their average salary.
Thus being frequently promoted has the effect of inflating benefits without increasing previous contributions, which means high flyers can receive a Managing Director’s pension on a Post Boy’s contribution.
However as a deferred member, my salary is permanently fixed and I therefore have no opportunity to increase my benefits in this way. Hence the relative lack of appeal to me.
In an attempt to sanity check my logic, I approached an IFA I’d previously used to review some financial plans for some informal advice.
I explained my situation, and why I believed that a transfer was the best course of action for me.
Off the record, his response was ‘that sounds reasonable’, so I set the wheels in motion.
Computer says no
After waiting for ages, my defined benefits scheme administrator provided me with a binding Cash Equivalent Transfer Value (CETV).
I looked over the figures. To me it seemed a fair price for the guaranteed future entitlement I was giving up, so I approached my SIPP provider to initiate the transfer.
First problem!
My SIPP provider said that as the transfer was to come from a defined benefits scheme, they could only process my transfer if I had received advice from an IFA.
Then things got rather Kafkaesque. My SIPP provider added that they could accept the funds even if the advice from the IFA was that the transfer was not the right thing to do!
This struck me as an insane position to take.
Do not pass Go
Second problem – I went back to my IFA who told me he could run the numbers for me, but that it would probably cost around 10 per cent of the fund’s value!
I politely declined his offer; I am a firm believer that minimising professional fees for advice or management [4] is one of the best ways to maximise investment returns.
I mused on the possibility of finding an accommodating IFA who would say ‘don’t do it’ for a nominal fee of £50. I could then present this negative advice to my SIPP provider, and they would presumably initiate the transfer.
After all, if the IFA said ‘don’t do it’ and I did it anyway, surely I couldn’t sue them? What would they have to fear?
Equally, the SIPP provider presumably felt that as long as there was a tick in the ‘client has received advice from an IFA’ box, they couldn’t be held liable if the transfer turned out to be a poor decision?
To be honest I was slightly offended that my SIPP provider would not accept my decision, despite the fact that I had thought the issue through quite thoroughly and decided it was the best course of action for me.
It was as if I was not qualified to make my own choices and accept the consequences.
Instead I had to pay some professional to tell me what I should do and to accept legal liability for that advice.
I did approach a couple of IFA’s and cheekily suggested my £50 for an immediate ‘Don’t do it’ report, but they weren’t keen for some reason. Presumably because it was more profitable for them to ‘run the numbers’.
A roundabout solution
Having seemingly exhausted my options, it looked like I wouldn’t be able to affect a transfer – even though I genuinely wanted to.
Clutching at straws I approached my company pension provider.
It transpired they were far less squeamish about accepting money from a defined benefits scheme.
All I had to do was answer some questions over the phone about my understanding of the risk, which was presumably recorded and filed under ‘in case he tries to sue us later’.
Hey presto! The money was transferred into my company scheme for a few months while I finalised the timing of my resignation.
Then, once I had left, I simply transferred the whole lot – final salary part and all – into my primary SIPP [5].
Job done. Hurrah!
Have you transferred (or given up on transferring) a defined benefits scheme? Did you go through a similar rigmarole? Or perhaps you think it’s never right to trade in a final salary pension? Please share your (polite, constructive) thoughts in the comments below.