7 Questions To Ask Before You Transfer Your Pension Funds

Billions of pounds worth of pension assets are changing hands today in the UK.

Several factors are behind the change including regulatory changes and new demands from investors. What do these changes mean for you and your financial future?

Pension Transfers In The News

What exactly is happening when it comes to pension fund transfers? To answer that question, let’s consider a few recent news reports:

• Partial Pension Transfers. According to industry experts, only 10% of defined benefit pension funds currently offer the option to transfer a part of your pension assets. That reality means people are being forced to move their whole cash equivalent transfer value causing a huge spike in pension money movements. If you have a defined benefit pension, it’s worth asking if a partial transfer is available. (Source: FT Advisor)

• Record Volume of Pension Transfers. In 2016, more than £25 billion in pension assets were transferred out of pension schemes. This activity suggests that investors are seeking additional flexibility and control over their assets and financial future following Pension Freedoms. (Source: FT Advisor)

• Improved Market Options. Recent FCA rules require that annuities offered by product providers internally now be made available on the open market. This means you now have a wealth of new choices for your pension money and the income it provides (Source: Money Marketing)

This trend also means that many more investment firms will be seeking to serve you. To make a smart decision about your pension funds, you need to start by understanding the options.

Questions To Ask Yourself

In some cases, your pension plan may provide for all of your financial needs for years to come. But how do you know that for sure? With all the changes in the pension marketplace, take the time to fully review your pension.

1. What Are My Pension Options?

In regards to occupational pension schemes, each employer has different priorities when it comes to compensation and pension benefits. For example, recently formed companies tend to emphasize flexibility in retirement funds through a defined contribution scheme. Some older organisations can provide higher payments but fewer options as in the case of defined benefit schemes.

Action Step: Contact your current and past employers to request documents explaining your pension plan options.

2. Is A Lump Sum Option Suitable For Me?

Most defined benefit scheme offer the option of tax-free cash or the options to exchange some of this for more guaranteed lifetime income. Do you need the tax-free cash or will a higher income be more beneficial?

The majority of non-defined benefit schemes offer access to 25% of the transfer value as a lump sum. If you don’t take it and you’re buying an annuity, you can purchase more income. If you are looking to move into drawdown and don’t take it immediately, you will be taxed on future withdrawal, whereas at the outset, 25% of it is tax free. If you need an income or small lump sum from your pension, but don’t need the maximum tax-free cash, consider phased drawdown.

Action Step: Review your pension plan’s options regarding lump sum payments and transfers.

3. Do I Have A Complete File On My Pensions?

Keeping track of your retirement benefits may not be at the top of your list. After all, you may be concerned with other matters like taking care of family, volunteering in the community and pursuing personal projects. Fortunately, you don’t have to spend weeks or even days on your pension and financial matters. A few hours per year is all you need to commit.

Action Step: Schedule one hour in the coming week to review my pension file and request any missing documentation (e.g. forms and statements).

Questions To Ask Your Financial Adviser

With so many options available when it comes to pension funds, you’re probably wondering if you are making the most of your money. A meeting with an investment professional can give you the answers you need. To make the most of the meeting, come prepared with these questions.

1. Identify any terms, options and language you don’t understand in your pension and request an explanation

Investment documents sometimes use unclear language. Make sure you understand the key terms and options that relate to your pension such as the difference between a defined contribution plan and a defined benefit plan.

2. Ask for several investment options with different objectives

No professional will recommend a “one size fits all” approach to investments. Seek out at least 2-3 investment plans. Expect that investment plans that promise higher returns will come with a higher risk of investment loss. The investment plan should feature a portfolio of investments such as bonds, stocks and other assets.

3. Ask to see any testimonials of clients previously helped by the adviser.

If you’re new client to an adviser practice, you may not have that trust built up which is so important. Many firms have online reviews where you can read about the experiences of previous clients.

4. Ask about the investment professional’s experience and process regarding pension plan assets

You need to be comfortable with the financial professional who is looking after your pension. If mistakes are made during the process, it can cost you a lot of money. In 2016, the FCA issued a fine over £200,000 to an investment professional who recommended unsuitable and unregulated investments to clients.

Look on the FCA Register for both your Financial Adviser and also the Firm they work for.

Lear about: Withdrawing a transferred DB pension without investment risk