Iain Wishart takes a look at the options available to clients with the pension freedoms now in place.

    Since the recent Pension Act 2015 introduction of new pension freedoms and flexibility, we’ve noticed a rise in enquiries from those holding all types of pension schemes (including preserved final salary benefits) seeking greater clarity over what is now on offer.

    ‘Holders of private sector final salary pensions do usually have the ability to ‘transfer out’ and access the new freedoms.’

    We are not alone. I hear final salary (defined benefit) pension scheme administrators have witnessed a 45% to 50% surge in interest from holders of these schemes looking to perhaps transfer out into a new style personal pension that will allow access to the new freedoms.

    The new pension rules offer clients much greater flexibility over what they can do with their pension pots.

    ‘Locked out’?

    Many of the pension freedoms and flexibility that came into force on 6 April 2015 only apply to those with 'defined contribution' or 'money purchase' pension schemes i.e. ‘pots’ of money.

    Hence, the new retirement revolution does not apply to those holding 'final salary' (also called ‘defined benefit’) pensions - which provide a ‘guaranteed’ income in retirement. That said, holders of private sector final salary pensions do usually have the ability to ‘transfer out’ and access the new freedoms.

    Many of these pension members (rightly or wrongly) are feeling locked out. All this publicity has reignited interest in their preserved pension schemes.

    Mind you, a pension transfer away from a former final salary pension scheme- could be the right thing or the wrong thing for a client.

    Financial advisers would do well to tread lightly here.  I note that in the field of defined benefit pension (final salary) transfers and opt-outs, from 2011 to 2014 there were 400 complaints to the FOS - with an astonishing 66% of complaint cases upheld for the complainant.  This figure is even more surprising given the fact the FCA heavily regulates this area of advice.

    I’ve written to the FOS seeking clarity over their own in-house qualification requirements, experience and just how up to date the FOS case handlers really are in light of the new legislation. Since 6 April 2015, the advice profession and clients have moved beyond relying heavily on the transfer value analysis (TVAS) alone – but have the FOS? Watch this space!

    Whether this 66% figure is down to genuinely poor advice, poorly recorded advice or perhaps some flipping of coins at the FOS is unknown. Advisers would do well to adopt a sceptical outlook from the outset. Check your permissions, processes and the small print in your professional indemnity insurance.

    Not all advisers hold the necessary qualifications and (recently updated) FCA pension transfer permissions. Those whom did under the old ‘advising on pension transfers and opt outs’ should have been automatically moved across to the new regime ‘advising on pension transfers, conversions and opt outs’ – but it is worth checking your firm’s permissions on the FCA Register.

    If this is anarea of advice you wish to move into, but no one at your firm holds the relevant qualification, then even once a suitable qualification e.g. CII- AF3 has been obtained there is still a period of sign off required – usually be a third party.

    Good luck to anyone sitting AF3 – I remember well the hell that was CII – G60! Showing my age now.

    12 good reasons to explore a potential final salary pension transfer

    Despite all the doom and gloom and the clear risks for advisers (and clients) in this space, here’s 12 reasons why a pension transfer could still be worth exploring:

    • Improved or alternative death benefits -  the ability for a spouse, an unmarried partner and /or children (or other beneficiaries) to inherit your entire unspent pension fund free of inheritance tax.
    • Increased levels of tax free cash – may allow mortgages to be repaid early thus facilitating earlier retirement, change of career etc.
    • Current pension scheme in deficit (has a ‘black hole’) – so you may be worried you will not get all that is promised to you.
    • Control – many ex-employees have concerns about their former employers and simply want away and to have more control over their pension.
    • Greater flexibility when shaping the benefits – most final salary pensions include a spouse’s pension on death - even if you are not married or in civil partnership. If you are single, why pay for benefits you don’t need?
    • Tax planning – final salary pensions may push you into higher rates of tax. A more flexible pension arrangement can enable you to avoid this.
    • Income flexibility and phasing – you may want to take higher levels of income initially – for example, until the State or other pensions kick in, then reduce the income from your pension later.
    • Health – if you’ve had health issues and/ or a regular smoker, then it may be possible to replicate the current pension benefits privately using guaranteed annuity rates and obtain a greater level of guaranteed pension.
    • Better off (potentially) – if, on balance, you could well be better off and receive more benefits as a result of such a transfer.
    • Consolidation – where several pensions brought together for control, ease of administration and management.
    • Enhancement – where the transfer value on offer has been enhanced as an incentive for you to transfer away.
    • Moving abroad – if you are retiring abroad then alternative flexible pension structures could be worth exploring e.g. QROPS.

    A full analysis of the client’s personal finances, financial objectives, family circumstances and the pension scheme itself are required before any informed decision can be made.

    We use a specialist additional fact find for final salary pension transfer queries. Where clients have specific wishes and wants, then it’s wise to get those in the client’s own handwriting.

    Do ‘insistent clients’ really exist? Those employing you to give advice that they then wish to ignore?  I’d suggest that from a business point of view it could be well worth walking away from that type of business and client. In April 2015, the FCA issued a fact sheet No.35 on pension reforms. There’s more on the insistent client issue in there.

    Our TVAS system is supplied via www.selectapension.com – helpful support too. Gone are the old days of relying upon dinosaur insurance companies efforts in this arena!

    We recently signed up (at a small fee) to gain some more specific CPD in this area via John Renolds at:  https://expertpensions.co.uk/ . They help with AF3 training too.

    Other TVAS system providers and pension trainers are available!

    Beware the ‘scammers’

    There have been several pension liberation scams where investors have lost all their pension money. For this reason many clients are wary (or should be).

    Further information is given here: http://www.actionfraud.police.uk/sites/default/files/Pensions%20Regulator%20-%20Members%20Leaflet.pdf

    Hence, its essential clients seek professional advice from an FCA authorised and regulated pension transfer specialist like ourselves.

    Now or never?

    Low UK gilt rates used to calculate your pension transfer value have increased many transfer values to relatively ‘high’ levels (over what we have seen quoted historically). Mind you, it should be noted that those same low gilt rates can mean the annuity rates available from personal pension pots have also come down. Swings and roundabouts.

    The information in this article does not constitute financial or other professional advice.

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