The Effect of New Pension Transfer Charges
Whether you’re an expat or not, since October 2020 the rules for defined benefit pension transfers have changed. The FCA introducing these rules to remove contingent charging, or simply the concept of financial advisers getting paid only if transfers go ahead. Previously, instances of advice given with a bias to ensure transfers goes ahead so the adviser gets paid were frequent, when the correct advice would have been to not transfer.
Some of the new rules make sense with the FCA starting to recognise the issues with contingent charges outside of the UK, exacerbated by thousands of expats seeing pensions transferred into offshore bonds or other investment vehicles with high charges, exit penalties, expensive 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.
From now on, you'll pay for advice regardless of whether a transfer takes place or not, potentially incurring costs only to be told not to transfer. This is where many believe the rule changes are flawed, as only the wealthy can pay non-contingent fees for taking professional advice and less affluent pension holders are deterred from doing so. However, there are ways to avoid this substantial expense which we explain more on below.
Furthermore, If you have already paid handsomely for advice as an expat and then require another firm to execute the investment side, 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 transfer your pension, first request a CETV (cash equivalent transfer value) from your scheme which contains the cash sum the scheme will offer you and scheme particulars. A CETV is free of charge, but a recalculation requested within 12 months may incur costs. CETV's are guaranteed for 3 months after which can increase or decrease. Some schemes offer incentives to transfer by increasing the value which is clearly explained, but your decision should not be based solely on this higher value.
Pensions are extremely complicated so having done your research, the next step is finding a good adviser who offers ‘triage’, to help understand what you are giving up by transferring. This may include reading materials or watching videos supported by a questionnaire. Triage should be free of charge.
You can request ‘abridged advice’ - a shorter version of full advice that confirms it's clear that a pension transfer is unsuitable for you. If this isn't obvious, you'll be informed that recommendations can only be provided if full advice is taken. Abridged advice does not qualify as 'full advice' which is still required to transfer and may also incur a cost, but is far cheaper. All firms should provide complete transparency on how you will be charged for all aspects of the process.
The Advice Part
Giving up DB pension benefits is one of the biggest decisions you may ever make. People often get excited on receipt of a high CETV but your wider circumstances must be considered. Assets, other pensions, anticipated income, expenses, plans for retirement and health are all vital, which may be difficult to predict if you are many years away from retiring.
How will you feel post-transfer having given up a secure, index-linked income for life in exchange for a fluctuating, sometimes volatile investment? Even for cautious investors, market uncertainty, having to consider your risk appetite and capacity can be unnerving.
However, some DB schemes offer low income, spouses pension nothing for beneficiaries on the 'second death'. The benefits of transferring are often too great to ignore, with early retirement, greater liquidity, options over receiving income and leaving funds to loved ones being the most obvious.
To be sure you're getting the correct advice on transferring your pension, get in touch today.