New rules will soon be implemented that will make it even harder to review your defined benefit pension.
There is now a limited window of opportunity to get a review done before costs increase and many professionals stop providing advice in this area.
If a defined benefit transfer is right for you then, based on current market conditions, now could actually be one of the best times to do it.
How to review your defined benefit pension
A defined benefit pension (also known as a final salary pension) is a pension that ‘guarantees’ you an income for life at a pre-determined retirement age.
Most public sector pensions are defined benefit whereas most of the pensions in private sector are now defined contribution.
Defined contribution pensions offer no guaranteed income for life. Instead your contributions build a pot that you can access from age 55.
Whilst public sector defined benefit pensions can’t usually be transferred, private sector defined benefit pensions can. A transfer could take place providing you have not yet started to receive pension income, it is a deferred pension and you have taken professional advice.
For the majority of people, transferring a defined benefit pension will not be appropriate.
But for some there may be certain circumstances that mean you should at least review your defined benefit pension. These include:
- Married with children.
- Suffering from ill health that means a shortened life expectancy.
- You have multiple defined benefit pensions.
- You want flexibility in how you take your income.
Now is the time to review your defined benefit pension
From the 1st October 2020 the Financial Conduct Authority will be launching new rules for Financial Advisers to follow when giving defined benefit pension advice.
Whilst the aim of the new rules are to provide better protection for the consumer (and this is of course a good thing) there will be a knock-on effect that could actually reduce the quality of advice and increase costs for the consumer.
So, if you have been planning to review your defined benefit pension now is the time to do it. Here’s why…..
#1 – Increased costs
Over the last few years defined benefit transfer fees have already risen due the huge increase in professional indemnity insurance costs that Financial Advisers need to pay to give this type of advice.
Many insurance companies no longer cover this type of advice and some have come out of the market altogether.
From October the new rules mean that Financial Advisers cannot operate a contingent charging model. This means they cannot offer a free review and then only charge if you proceed with a transfer.
The idea is to stop any bias in the Financial Adviser’s recommendations which in theory sounds like a good thing. However what it does mean is that you could be charged a fee that runs into the thousands for a review that recommends you not to transfer.
Even if you wanted to still proceed against the advice many personal pension providers will no longer accept defined benefit transfers where the advice was to remain with the existing scheme.
#2 – Less choice of Financial Advisers
The professional indemnity insurance issue has caused many Financial Advisers to remove their pension transfer permissions and stop providing advice in this area. This means consumers will lose access to many quality Financial Advisers leaving a smaller pool of choice and making it nearly impossible to transfer a defined benefit pension.
#3 – Impact of Covid-19
A private sector defined benefit pension is not actually as guaranteed as you may think. It is only guaranteed as long as the company providing the pension is able to afford it.
Many defined benefit pension schemes are in deficit and the business world is changing all the time. Can you be confident your former employer will be around for the length of your retirement, say 30 years?!
Now of course Covid-19 has made the future for many companies even more uncertain.
Whilst there is a Pension Protection Fund (PPF) that could potentially rescue failed pension schemes it is not guaranteed and can’t take them all.
Even if your pension scheme does fall into the PPF, your benefits will then likely reduce.
#4 – PPF legal case
There has been a recent High Court legal case that ruled that the reduction in pension benefits for members of the PPF is age discrimination.
This could now mean the PPF takes on even less schemes in the future or reduces the pension benefits even further for all.
#5 – Higher transfer values
When you review your defined benefit pension you will need the cash equivalent transfer value.
There is a complex formula to work this out but one of the main drivers of the value will be current interest rates and more specifically Gilt Yields.
With interest rates very low at the moment this actually increases the potential cash equivalent transfer value on offer to you.
#6 – Cheaper stock markets
Covid-19 has also had a huge impact on global stock markets with many still some way down from their previous highs.
Therefore, when investing your defined benefit pension transfer value you could be buying stocks that are a lot cheaper than what they were which means potentially more growth in the future.
Of course the market could fall further.
Like I said earlier. Transferring a defined benefit pension is not going to be right for the majority of people. For some it could be and you should at least get it reviewed to understand what’s best. The time to do that review is now.
If you would like to understand the defined benefit pension review process and the potential fees involved please secure a free 15-minute call with us. You can speak to a Chartered Financial Planner who will listen to your situation, give you an outline of what you need to consider and guide you in the right direction.
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.