The increasing number of people transferring their defined benefit company pension scheme into a personal pension has become a concern for the FCA in recent years, but with a huge mis-selling scandal in the news again last week and pressure from government, we may see some rule changes in future.
So what has happened?
Tata Steel could no longer support it's very generous defined benefit pension scheme* so workers had the option of joining a new scheme which was accepted as better than falling back on the Pension Protection Fund**. The third option was to take a lump sum value and transfer it into a defined contribution personal pension***.
What is the problem?
It's not always in your best interests to transfer out, even though it might seem like a lot of money being offered. The Work and Pensions Select Committee looking into the Tata case suggests there has been a "major mis-selling scandal". This is because some financial advisers may have been tempted to recommend a transfer out in order to earn fees regardless of the client's best interests.
Why would anyone want to transfer?
Since pension freedoms were introduced by George Osborne, personal pensions are certainly more attractive than they used to be. For example you can access your pension at 55 now, and pass it on to whoever you choose. They are a very tax efficient investment. This is not possible with most company pension schemes. However company pension schemes are not affected by the vagaries of investment markets and the associated risks. They pay a defined amount until you die and in many cases provide a generous widows pension. Essentially moving your pension means transferring all the risk from the scheme to you! Given rising life expectancy your money could have to last a very long time!
How will you know if it's right for you?
Only by completing a detailed analysis of the scheme terms and conditions (each one is different and some companies have many different schemes) and doing a full review of your own circumstances and financial situation could any adviser tell you the best course of action and explain the benefits versus the risks. The advice must be given, or overseen by someone with specialist exams.
So how has there been mis-selling?
It all comes down to ethics and charging structures. There might be a lot of money in the pension transfer, but the worker might not have the cash to pay for advice up front. If all the fees are "contingent" on the transfer completing, you can see where the problem lies. But on the other side of the coin, you might argue if the transfer is in the best interests of the client they should be allowed to defer payment. It is their money after all.
How does FMB help clients in this situation?
When you become a client of FMB you sign up to an ongoing financial planning service which is not a transactional arrangement, so we never give advice on anything in isolation. We start with a comprehensive review of all your finances and circumstances. We charge for this based on an hourly rate. If there is work to be done as a result of the plan, such as an investment or insurance policy, then we charge separately for that. The problem with the pension transfer scenario is if the advice is to keep the pension where it is, the client will feel they have paid for nothing. However, if you are having a full financial review we would argue there is a great deal of value in that regardless of the outcome.
We have qualified and experienced people who know about the technical side of pension contracts and can unpick the jargon for you. We have designed a process of senior scrutiny and sign off that ensures all our planners act consistently. Our company values mean that we always act in the client's best interests because we have been here 30 years and if we don't, we certainly won't last another 30.
We always meet with people for a general chat about their circumstances to establish what we can do to help. There is no obligation and it is free of charge. You can get in touch here or call the office on 01539 725855
Unpick the jargon!
*A defined benefit pension plan is a type of pension plan in which an employer/sponsor promises a specified pension payment, lump-sum (or combination thereof) on retirement that is predetermined by a formula based on the employee's earnings history, tenure of service and age, rather than depending directly on individual investment returns. Traditionally, many governmental and public entities, as well as a large number of corporations, provided defined benefit plans, sometimes as a means of compensating workers in lieu of increased pay.
A defined benefit plan is 'defined' in the sense that the benefit formula is defined and known in advance. Conversely, for a "defined contribution retirement saving plan", the formula for computing the employer's and employee's contributions is defined and known in advance, but the benefit to be paid out is not known in advance
**The Board of the Pension Protection Fund (PPF) is a statutory fund in the United Kingdom, intended to protect members if their pension fund becomes insolvent. It was created under the Pensions Act 2004. The Board of the PPF is a statutory corporation responsible for managing the Fund and for making payments to members.
The PPF started on 6 April 2005 in response to public concern that when employers sponsoring defined benefit pension schemes became insolvent, scheme members could lose some or all of their pension if the scheme was underfunded. Besides offering compensation to those pension scheme members affected by insolvencies the Government hoped that the existence of the PPF would improve confidence in pension schemes generally
***Defined contribution plans In a defined contribution plan, contributions are paid into an individual account for each member. The contributions are invested, for example in the stock market, and the returns on the investment (which may be positive or negative) are credited to the individual's account. On retirement, the member's account is used to provide retirement benefits, sometimes through the purchase of an annuity which then provides a regular income. Defined contribution plans have become widespread all over the world in recent years, and are now the dominant form of plan in the private sector in many countries.
Source – www.wikipedia.org