One item to make the headlines recently, for all the wrong reasons, was the transfer out of British Steel pensions (a defined benefit or DB scheme) into Personal Pensions (PPs) or Self-Invested Personal Pensions (SIPPs). The reason they hit the headlines was because the regulator – the Financial Conduct Authority (FCA) – said that a lot of these transfers were not compliant; or at least the paperwork wasn’t.
When an adviser transfers any pension today, he must specify why it is being transferred, based on factual information. The adviser needs to show the client has a need to move the money and that this need can only be satisfied by transferring the pension to a different provider. Now this can cover a whole raft of scenarios, but it will never include transferring a pension because the client thinks it might be helpful, even when a client gives their approval.
Death benefits is a good example. Let’s say someone has £250k in a DB scheme, and would like to ensure their children benefit from this when he/she is dead. If this pension was transferred solely for this reason, it would be the adviser who would get into bother, as there is no need to move it; it would only be a “nice thing to have”. If in the same scenario, the person had a critical illness and perhaps didn’t have long to live, there is then a need to transfer it sooner rather than later, before it dies with the individual.
The problem here is that a lot of DB schemes have such big transfer values, they are turning people’s heads and not making them think logically. That’s where an adviser comes in – to provide logic (hopefully). People fail to realise that such pension funds are meant to last a lifetime, and in a lot of cases might fritter this away very quickly, long before they should. The adviser should be the voice of reason.
Someone may in all eventuality be far better off taking the pension over their lifetime as it was intended, and not transferring it, only to blow their 25% tax-free cash on luxuries that they otherwise wouldn’t have bought, and then taking out more each year than is logical. Think twice when transferring a DB scheme, as you will need to be able to afford a long and healthy retirement.
You should also think twice about what you do with your pension when you retire, as you can only spend your money once. When you reach the age of 55, you can take out 25% of your fund as tax-free cash, and anything withdrawn thereafter is liable to tax at the highest rate applicable.
So if for example you earn £30k p/annum and are thinking of taking £40k out of your pension fund, you might need to think again – the first £11,500 is tax-free, the next £33,500 is taxed at 20%, and the remaining £25,000 is taxable at 40%. If you only got tax relief at 20% when you paid it in, it is daft (to say the least) to take it out and pay 40%. You need to watch what tax rate is applicable when you take money out. You can take out what you like when you like but you must pay the tax that goes with it.
If you would like some advice on your pensions, whether DB (defined benefits) or DC (defined contribution), then why not contact Money Advice & Planning. Visit us at www.mapfinances.co.uk and use the contact form. Alternatively, call your local MAP adviser at a time which suits you.
The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Links to external sites are for information only and do not constitute endorsement. Always obtain independent professional advice for your own particular situation. Money Advice & Planning Ltd is authorised and regulated by the Financial Conduct Authority.