One of the questions I get asked about most is whether to transfer a pension. Whether you are a dedicated pension officer or have a wider role in HR and reward, you likely have dealings with people who are transferring their pensions from one place to another, you may be one yourself. This article answers the most common confusions people have and explains why not all pension transfers make sense.
Firstly, let’s work out the difference between a “pension pot” and a “pension”. A pot is a sum of money invested to provide a pension in the future, but it’s not a pension. A pension is a regular stream of income, a wage for life designed to last as long as you do.
Next, please forgive me a generalization. Pots can and should be transferred so that we have one big pot. If you have lots of little pots when you retire, it is much harder to turn them into a pension. Pensions can also be transferred but only very rarely and it is generally a bad thing to transfer pension rights to pension pots. As a general rule, transfer pots but don’t transfer pensions.
Worryingly, it’s estimated that some £40bn has been transferred from pension schemes to pension pots since pension freedoms came into effect in 2015. That’s a lot of money. You could transfer pensions before then but there seems to have been a big acceleration in interest since 2015, fuelled by people wanting to take advantage of freedoms, generous transfer values and advisers only too keen to help.
The problem is that while it’s quite hard to get advice on finding, valuing and transferring small pots, it’s been quite easy to find a financial adviser to help you transfer your pension to a pot he or she can manage. And it now appears that around half of those £40bn of transfers made over the last five years were more in the interests of the adviser than the person whose pension became a pot
The most famous case of transfers going wrong is with the steelworkers who in 2017 were asked to make choices as to how they wanted their pension paid in the future. For many, it was Hobson’s choice between a pension scheme they had lost trust in and a Government lifeboat pension called the PPF. 7700 steelworkers elected to convert their pensions to pots and the Financial Conduct Authority reckons that around 50% of them shouldn’t have.
The problem has dragged on for four years and now the National Audit Office (NAO) has announced it will be looking into the FCA’s handling of the regulation of the advice given and the compensation that is being offered.
So what has this got to do with you? Well, if you are in personnel, your employer may have a defined benefit pension scheme that pays pensions (not pots) and it may be the members have been deciding to transfer pensions to pots. If this is the case, the decision and the advice given may well be under scrutiny. It is unlikely that the pension scheme will want to take back the money it has paid out (restitution). It may well be that your staff have been ill advised (and getting compensation), but most likely that the advice that was given was of high quality and that the transfer was suitable for the person making it.
The NAO’s report, which will follow its investigation next spring, will likely lead to changes in the way these pension transfers are conducted and also to changes in compensation when they go wrong. It’s worth bearing this in mind if you have staff who have transferred. While we shouldn’t pre-judge the outcome of the review, it is likely that it will lead to better consumer protection. Your staff may want to hold fire before appointing lawyers (especially on a no-win no-fee basis).
Pension transfers are slowing down, partly because advisers are more wary and partly because people can no longer pay for advice out of their pension pots (contingent charging).
Meanwhile the transfer of pension pots looks like speeding up. The Government is encouraging people to combine their pension pots by making pensions easier to understand. We are soon to have simpler pension statements which will be issued in a pension season, the hope is that by 2024, we will be able to see all our pensions and pension pots on a pension dashboard – which should make it much easier to manage our pots into one big pot and for us to work out our retirement finances without need of a financial adviser.
Many people will of course want to use a good financial adviser, but as with tax-returns, the option to do it yourself looks a lot cheaper for those with simple affairs.
So to sum up, pension pots are on the move and we are encouraged to combine them. Pension transfers are slowing down and we are encouraged not to transfer and to seek redress if we feel we have been badly advised. These may seem mixed messages and they are, sadly pensions are far too complicated, fortunately there are people like you who are there to help people understand. I hope this article has helped you understand!