How to work out if a UK pension transfer is in your best interests
When considering UK pension schemes, there are two main types:
1. Final salary or defined benefit schemes (FS). The value of your entitlement under this type of pension scheme is based on a set formula determined by the UK pension scheme trustees. The formula is generally associated with the number of years you have worked with the pension scheme and your final salary at the date of leaving. Different factors then apply to value additional benefits such as spouse’s pension, dependents pension, ill health benefits etc. Further, different rates are applied for revaluation (increases to the value of your pension pre-retirement) and escalation (increases in value of your pension scheme post retirement).
2. Money purchase or fund based pension schemes (MP) such as personal pensions, SIPPs, Group personal pensions, stakeholder pensions and other.
How do I know whether to Transfer?
In determining whether or not a transfer of your pension scheme should be undertaken, a comparison needs to be made of:
A) the benefits you have in your existing pension scheme, against
B) what you would receive in a new pension/superannuation arrangement, after tax and fees are taken into account.
There are various catches in ascertaining the value of both FS and MP schemes (i.e. to properly understand the value of A).
With MP schemes, whilst the valuation can generally be seen by looking at a MP fund statement, various penalties or guarantees can be built in which are extremely valuable. These need to be properly understood and valued prior to any potential transfer being considered so you understand what do you are giving up and whether the transfer is worthwhile. In many cases it is not in your financial interests to simply transfer a MP scheme without properly understanding these factors (as you can lose out as a result).
With FS schemes (based on set formula), the value of a transfer entitlement from an FS scheme (known as a Cash Equivalent Transfer Value) is generally determined by the pension scheme Actuary. The calculation basis underlying this figure can change over time and the value can easily vary based on the scheme assumptions. Note that it is the Actuary’s responsibility to ensure that the future liability of the scheme (i.e. payments to pensioners in future) can be met and the scheme does not fall into insolvency.
Hence, it is very possible that the value of the benefits you are giving up in the FS scheme will outweigh the lump-sum you have been offered as a transfer, even after considering the impact of differences in taxation.
So what do I do?
You have worked hard for your pension. Simply making a decision to transfer it because it is in the right currency, or in the right location, or for extra flexibility, means that you could be forgoing a significant amount in financial benefit and be much worse off in retirement.
For example, if your pension scheme offered you an annual pension of £15,000 per annum, increasing with inflation, as opposed to a lump sum of £100,000 – would you take the £100,000 now? Probably not.
Each case needs special consideration, and you have a significant amount to gain or lose as a result. Proper advice is recommended in all instances from a specialist who understands the workings of UK pension schemes. Note that with regards to FS schemes, this advice by law must be provided by a UK-based Pension Transfer specialist advisor.
Why Prism Xpat?
Prism Xpat has specialised in the UK Pension Transfer market since 2002. We have a team of in-house specialists including Actuaries who have worked with pension and superannuation consultancies, and advising individuals who have been mistakenly told to transfer out of their pension schemes by a financial advisor.
Over this time we had assisted thousands of clients. In many instances our advice has been for someone not to transfer the pension scheme but for us to review it again in 12 or 24 months.
In some of these cases we have seen pension values increase by over 50% – completely justifying the initial ‘no transfer’ decision.
Just remember, it is your pension. You have worked hard for it. You have one chance to get this right.
Once you have left your FS scheme, in most cases you will be unable to rejoin it.
It is a big decision and one which should not simply be made based on subjective criteria such as location or currency.
It is worth seeking proper specialist advice from well-qualified experts.
We would be happy to help you.