Defined Benefit Pension Transfer Fees

​If you are considering transferring a defined benefit pension then you need to be aware of the likely defined benefit pension transfer fees involved.

Last week I wrote about why it’s nearly impossible to transfer a defined benefit pension. The reasons covered in that article are why defined benefit transfer fees can appear to be high.

Hopefully, you now know that pension rules state that you have to take financial advice if your pension has guaranteed benefits over £30,000.

But what’s a fair price to pay? Let’s look at the data.

Average defined benefit pension transfer fees

There are two parts to a defined benefit transfer.

1. The analysis of whether a transfer is right for your individual circumstances.
2. If the transfer is appropriate, the implementation of organising that transfer into a defined contribution pension.

Remember, the rules state you don’t need to use and therefore pay a Financial Adviser to implement a transfer. You only need a Financial Adviser for the review (part 1).

Some Financial Advisers will charge for both parts of the process. Usually a flat fee for the analysis and a percentage of the transfer value to implement.

Some Financial Advisers will waive any initial costs for the review and will take their fee on transfer only.

Let’s look at some examples of typical costs.

According to Financial Adviser directory unbiased’s cost of advice tool, the average cost to review whether to transfer a defined benefit pension is £4,000.

The Financial Conduct Authority (FCA) have found that the average minimum initial charge for investment advice is 1% of the investment value, and the average highest initial charge is 3% of the investment value.

If we apply these percentage charges to £352,303, which is what the FCA found to be the average defined benefit pension transfer value over the last 4 years, you are looking at:

• Defined benefit pension transfer fees of £3,523 on the low end.
• Defined benefit pension transfer fees of £10,569 on the high end.

There is another issue worth mentioning at this point. The FCA are currently consulting on whether to ban contingent charging. This is where a Financial Adviser only charges a fee if the recommendation is to transfer and you proceed with that transfer.

The argument is that contingent charging biases the Financial Adviser’s opinion as they don’t get paid for hours of work unless you go ahead with the transfer.

In theory, this ban sounds rationale. However, in practice we need to think about the people where, based on their circumstances, it is appropriate to transfer but they don’t have the cash available to pay upfront. The value is locked inside the defined benefit pension.

Also, another scenario is where you are keen to transfer and pay a large fee upfront for a report that tells you not to transfer.

When it’s worth paying defined benefit pension transfer fees

The FCA believes in most cases it will never be right to transfer a defined benefit pension.

However, the type of person that may want to consider at least getting advice on whether a defined benefit pension transfer is appropriate is as follows:

• Married.
• With children.
• Understands investment risk.
• Is willing to take investment risk.
• Have other forms of guaranteed income that cover essential spending e.g. other defined benefit pensions, annuities, State Pension etc.
• High transfer value multiple.
• The existing scheme has a high pension deficit.
• Left the company and/or the scheme is closed.
• Wanting income flexibility.
• Don’t need the money.
• Leaving a legacy for the children.
• Wanting a higher lump sum.

The more of the above list you can tick off, the more chance a Financial Adviser will recommend a transfer.

For transparency, when it comes to the fees we charge, as I’ve said previously, we no longer give advice on defined benefit pension transfers directly. However, we work very closely with an outsourced partner to provide a fair system of charging which is as follows:

• A fee of £3,000 for the initial report on whether to transfer or not.
• If the recommendation is to transfer and you proceed the £3,000 fee is waived and the transfer charge will be tiered as follows:
  • 1.80% of transfer values up to £250k (£3,000 minimum fee).
  • 1.20% of transfer values £250k to £1m.
  • 0.60% of transfer values greater than £1m.

If you would like help understanding your position and whether you should be considering taking proper advice on a defined benefit transfer, then take advantage of our free 15 minute call. 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.

Risk warning:

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.