STEVE LOCKING of LMS Partners helps to cut through the mass of information on the issues.

In the three years since pension freedoms were introduced in the UK there has been a noticeable rise in requests to transfer out of final salary or defined-benefit (DB) pension schemes.

Steve Lockingm managing director of LMS Partners, is a well-known and respected figure in the island’s financial sector with more than 30 years’ experience in banking and independent financial advice.

We asked him to cut through the mass of information currently available about pension transfers, and provide some much-needed clarity.

Q1: Apart from Pension Freedoms, are there any other factors that are driving increased interest in transferring out of DB schemes?

Steve Locking: Whilst the introduction of Pension Freedoms was radical and has undoubtedly facilitated this trend, it is not the only reason for a high demand to transfer out of DB schemes.

There are, arguably, four other key factors for the current interest:

Most firms have closed DB schemes in favour of cheaper money purchase arrangements creating deferred membership.

Low interest rates and annuity rates have seen transfer values reach record levels, sometimes as much as 40 times their notional annual pension – much higher than the 20 to 25 times seen in the past.

Many DB schemes are in deficit and with increasing longevity, transfer values are being enhanced to encourage transfers out and so reduce long-term company liabilities.

High profile corporate failures, such as BHS, have also highlighted the plight of pension members caught up in the parent firms’ financial problems.

These factors have combined to create something of a ‘perfect storm’ and regulators are concerned that decisions to move away from these final salary schemes are being taken without sufficient understanding of the long-term repercussions.

The UK Financial Conduct Authority (FCA) states ‘in most cases you are likely to be worse off if you transfer out of a defined-benefit scheme’, and insists that advice is taken to transfer out of a scheme with a transfer value of over £30,000.

Q2: Are there some pension experts whose viewpoint differs from the FCA?

Steve Locking: Some pension experts take the view that the benefits of a DB scheme may not be 100% relevant to everyone.

The enhanced transfer values already mentioned can, in some instances, be an opportunity that’s too good to miss and may not be repeated – and there are other factors that need to be considered too:

Whilst a surviving spouse may be entitled to reduced benefits on a members’ death, ultimately your DB pension benefits die with you. Transferring out of a DB scheme into a money purchase scheme, typically a Self-Invested Personal Pension (SIPP), allows you to pass on any remaining pension funds to nominated beneficiaries. Existing poor health would certainly reinforce this argument.

Additional savings and investments reduces the reliance on the certainty of a DB pension income.

Flexibility in retirement. Being able to structure your income to suit your specific circumstances may be a priority for some individuals.

Concerns about the financial security of the pension scheme’s sponsoring employer may suggest a transfer is a prudent option.

Whilst these are only some of the considerations, there are counter arguments to most of the issues above that would point to someone not transferring and instead enjoying the certainty of an inflation linked income for as long as they live.

Q3: OK, what are the most important factors that someone should consider when thinking about transferring out of a scheme?

Steve Locking:

Their choice of SIPP provider.

One of the decisions to make is who you are going to entrust with holding and administering your pension benefits.

How long do they think they are going to live?

Many people underestimate their life expectancy. Recent research by the Institute for Fiscal Studies suggests that people are misjudging their survival prospects with people, in general, living much longer than they expect.

Investing for the long-term.

Recent research suggests that significant numbers of people transferring out of DB schemes are simply holding their pension funds in cash. With inflation running at around 3%, and predicted to be a feature for the foreseeable future, the spending power of benefits will be ravaged by the compounding effects of inflation.

What is their attitude to risk?

Many people instinctively suggest they are cautious investors when it comes to investing their pension which is, perhaps, a natural reaction.

However, being too cautious introduces a new risk because returns below inflation will erode the long-term value of their investments.

Someone transferring their benefits into a SIPP at the age of 55, and perhaps not intending to retire until age 65, should be considering a 10 year period of growth and then an income strategy that may be required for another 20 years or more.

Overall investment strategy.

The DB transfer market has introduced a large number of new people into the world of investments. Most people go through life with a reasonably tight budget, paying a mortgage, providing for a growing family and hopefully having an emergency fund in case of unforeseen expenditure.

Suddenly receiving a seemingly life-changing sum presents a whole new set of problems, so building up a relationship with an adviser becomes very important.

Having a wide choice of funds and investment managers. Sufficient diversification of funds can be delivered by utilising different strategies to combine into a global, multi-asset approach.

Costs are also an issue, consistently high charges can erode the long term real value of retirement planning.

Of course, in the context of this interview we can only give a brief overview of the wider issues that need to be considered when thinking about transferring out of final salary or defined-benefit (DB) pension schemes.

Once a transfer is completed, it is irreversible – as such it is a decision that can have a life-changing impact for individuals, couples, and their families for generations to come.

In this context it’s more important than ever to consult a qualified, regulated, independent financial adviser who can examine the complexities involved and help the client to make the best decision for their unique set of circumstances, and ambitions for themselves and their family.