Why transferring your pension is not always a good idea
Written by Sam Barrie on November 13, 2017.
Back in the day, before 2014 pension legislation granted retirees the freedom to do whatever they liked with their pensions, the vast majority of people bought an annuity which guaranteed them an income for life. Pension reforms saw the annuity market decimated almost overnight as many people now choose to keep it invested and simply draw down, with some even deciding to cash the entire pension in.
That has been bad news for those still looking for a guaranteed income as a lack of competition, combined with historically low interest rates, has caused annuity rates to plummet. Right now, a 65 year old buying a £100,000 annuity can expect a modest annual income of just over £5,000, compared to around £8,000 before the financial crisis of 2008.
However, some lucky savers in the 1980s and 1990s paid into pension schemes with guaranteed annuity rates (GARs). This means that the rate paid out is guaranteed at a certain percentage of the accumulated fund and this is much higher than the current market rates. In short, these are a brilliant offering and a huge benefit which people are often unaware of. So much so, that’s it’s proving to be a real thorn in the side for the pension providers having to make good on their promises.
This was the case for a new client of mine who recently asked me to analyse his pensions. Two of the three policies benefited from GARs with excellent rates. Transferring these schemes would have been complete folly as the rates would have been lost so I obviously advised him against doing so. But it got me thinking.
It’s sad to say but there are some pretty unscrupulous characters operating in this business, certainly internationally where the regulation may be less stringent. A less client-focussed financial adviser may have advised transferring the scheme because it would mean they could charge a fee for doing so. The client would have lost out significantly if given this awful advice.
There are many instances where pension transfers are a good idea but it is not always the case. If you’re thinking of transferring yours, make sure that you check if you have guaranteed annuity rates and the conditions attached to them (for example a set retirement date). Even if you do have a GAR, it could still be in your interest to transfer, for instance if you qualify for an impaired life or enhanced annuity. These pay out higher amounts to those with a lower life expectancy such as heavy smokers or those with diabetes.
This highlights the importance of working with a financial adviser that you can trust. I pride myself on my client-centric approach. All my financial plans are tailored to each individual’s unique needs and I will never try to sell products for the sake of it. If you’d like to have a chat about how I can help you with your financial planning, please do get in touch.