Transfer Defined Benefit Pension to SIPP
A transfer defined benefit pension to SIPP is something that we are often asked if it’s a good idea or not. Defined benefit pension schemes have often been branded the ‘golden handcuffs’ of retirement provisions. The reason for this is twofold:
1) Defined benefit pension schemes guarantee a level of income once you reach retirement up until the end of your life. The income will normally be index-linked, and offers a level of security that cannot be said of more traditional Money Purchase or Defined Contribution schemes.
2) They are notoriously difficult to transfer out of. The Financial Conduct Authority (FCA) have made it compulsory for anyone to seek regulated financial advice for any cash equivalent transfer value (CETV) over £30,000. Not only this, but the default stance from the FCA is that DB schemes should only every be transferred in exceptional circumstances. Reasons could include the transfer value forming a nominal amount of total assets, or if the individual was in really poor health.
This stringent regulation imposed has caused transfer procedures to be very costly. For a signed off report from a UK specialist, this can cost anywhere between £1500-3000. On top of that, there will likely be advice and set up fees on the new solution recommended. These costs are a reflection of how much work can go into transferring the schemes, which can take anywhere between 2 weeks and 3 months.
Is Transferring my Defined Benefit Scheme the Right Thing to Do?
The answer to this depends entirely on the individual’s circumstances:
- How good is the transfer value?
- Do you have other forms of guaranteed income, such as state pension or an annuity upon retirement?
- Are you in good health?
- Do you have beneficiaries you wish to leave something behind for?
- Do you have existing liabilities?
- Does the transfer value represent a significant total of your assets?
These are some of the questions that must be asked when considering a transfer, but not an exhaustive list. By transferring from a Defined Benefit scheme, considerable investment and market risk are added to your retirement. Your future income will no longer be guaranteed, but directly related to the underlying investments held within the new portfolio. For some people with investment experience, this may not be an issue, or even desirable. However, for inexperienced investors this could represent a big problem.
Taking Regulated and Trusted Advice
When looking to transfer any pension scheme, regardless of it’s nature, always seek the help of a regulated financial professional. For transferring Defined Benefit schemes, we would only recommend working with a firm that adopts the Pension Transfer Gold Standard
The Gold Standard has been pioneered by the Personal Finance Society and aims to recognise firms that have adopted the highest standards of due-diligence and ethics.
It is governed by the following 9 principles:
- Helping clients understand when advice is appropriate
- Ensuring advice given supports the clients overall well-being in the context of their stated objectives
- Ensuring client understanding and acceptance of all charges
- Ensuring the most appropriate and updated technical skills are applied
- Transparent management of Conflicts of Interest
- Helping clients understanding the cost of transferring benefits
- Avoiding unregulated investments
- Transparency in advice processes and outcomes
- Promoting the Consumer Guide to the Pension Transfer Gold Standard
What’s the Best Option for a Transfer Defined Benefit to SIPP?
For Expats around the world, there are 2 main options to consider when transferring your existing UK Defined Benefit scheme – A Qualifying Recognised Overseas Pension Scheme (QROPS) and an International Self-Invested Personal Pension (SIPP).
These schemes can be incredibly useful if the transfer value of your pension is approaching the lifetime allowance. That is because by taking the fund out of UK jurisdiction, the lifetime allowance charge no longer applies. However, if the QROPS is registered outside of the European Economic Area, it is no longer a viable option as it would be subject to an Overseas Transfer Charge of 25%.
For smaller transfer values, an International SIPP is usually the better option. They are far more cost-effective than QROPS plans, with annual fees normally 50% less than what you would normally pay. Furthermore, the funds remain in UK jurisdiction.
The UK remains one of the most stringently regulated and protected environments around the world. As such, it offers individuals with peace of mind that their investments will be as safe as possible. The same cannot be said of a QROPS, where over the last few years there have been several scandals relating to missold funds and liquidated investments held in QROPS plans.
Seeking Independent Advice
Like all areas of financial planning, it’s important to seek fully transparent and independent at advice. At Harrison Brook, we are proud of our independence. We are not tied to any product or provider – our only goal is finding the best value bespoke solutions for our clients. For an initial consultation, please get in touch to see how we can help.