How New Pension Transfer Charges Affect You
From October 1st 2020, regardless of whether you’re an expat or not, the rules for transferring your defined benefit pension have changed. The FCA’s motivation for introducing these new rules is to remove contingent charging, or in other words, the concept of financial advisers getting paid only if the transfer goes ahead. In the past, this business model has seen many instances of advice given with a bias to ensuring a transfer goes ahead so the adviser gets paid, when the best outcome would have been to not transfer at all.
In some aspects, the new rules make sense as the FCA is also starting to recognise issues relating to contingent charging outside of the UK, which have been exacerbated by thousands of expats finding their assets transferred into offshore bonds or other investment vehicles with high charges, exit penalties, expensive underlying funds and unregulated investments, often with catastrophic results. Visit our pages on how to pay for financial advice and things that are good to know to learn more.
Going forward, you'll be required to pay for advice regardless of whether a transfer takes place or not, potentially incurring a significant cost only to be told not to transfer and for nothing to change. This is where many advisory firms believe the rule changes are flawed, as only those with sufficient wealth to pay a non-contingent fee will be able to afford taking professional advice, whilst less affluent scheme members are denied the opportunity to do so. However, there are ways to avoid this substantial expense which we explain more on below.
Serious concerns have also been raised over the prospect of increased costs to clients. If you have already paid handsomely for advice and then require another firm to execute the investment side, the overall fees may increase as the transfer advice fee can’t be deducted from the overall cost.
Where Do I Start?
If you wish to investigate a pension transfer, the first step is to request a CETV (cash equivalent transfer value) from your scheme administrator. This contains the cash sum the scheme will offer you as well as the crucial scheme particulars. A CETV is free of charge, but if a recalculation is requested within 12 months it may incur a cost.
Your transfer value is guaranteed for 3 months which may increase or decrease if recalculated. Some schemes offer incentives to transfer by increasing the value which will be clearly explained, but your decision should not be based solely on this higher value.
For the majority, pensions are extremely complicated so if you haven’t done your research already, the next step is finding a good adviser who offers a ‘triage’ service to help educate you on the principals of what you would be giving up by transferring out. This may include reading materials or videos, supported by completing a questionnaire. Triage should be free of charge.
Following triage you can request ‘abridged advice’ - a shortened version of full advice that can confirm that it's reasonably clear that a pension transfer is unsuitable for you. If this outcome is not immediately obvious, you will be issued with a statement explaining that a recommendation can only be provided if full advice is taken. Abridged advice does not qualify as a confirmation that you have taken advice, which will still be required to transfer. It may also incur a cost but far less than full advice. All firms should provide complete transparency on how you will be charged for any aspect of the services you receive from them.
The Advice Part
Giving up a DB pension is one of the biggest financial decisions you may ever make. People often get pound signs in their eyes on receipt of a high transfer value, but your overall circumstances must be considered in full when advice is taken - assets, other pensions, anticipated income, expenses, plans for retirement and health to name just a few, and this may be difficult to envisage if you are years away from retirement.
It is also vital to consider how you will feel post-transfer. Giving up a secure, index-linked income for the rest of your life in exchange for an investment that will fluctuate in value, sometimes considerably, unlike your current DB pension scheme is a decision that cannot be reversed. Even for cautious investors, living through extreme market volatility and having to consider whether your risk appetite and capacity for loss are what you thought they were, is something most didn’t expect. The pandemic has changed that.
However, the potential benefits of transferring a pension compared to the disappointing income that some schemes offer are sometimes too much to ignore. Earlier retirement, greater liquidity, choice over when you receive income and leaving the funds to a beneficiary being the most obvious.
Whatever the outcome, your adviser should provide a detailed written report clearing explaining their recommendation to transfer, or not, and the rationale behind it.
Request a Free Consultation
If you are considering a pension transfer and want to know if it’s right for you, visit our contact page and get in touch to speak to an expat financial advisor who will provide best-advice, minimise costs and leave you with complete peace of mind.