Defined Benefit Transfers

Defined benefit Transfers - Got Questions?Top 5 questions about Defined Benefit Transfers

Do you understand how Defined Benefit Transfers are valued?

Defined Benefit Transfers can be a complicated and daunting task to consider. Understanding the details is essential to making the right decision.

At Capital Wealth Partners we deal with Defined Benefit Transfers all the time, and most clients have similar questions. Due to this I have answered the top five questions we are asked. Hopefully this will make things a little clearer when considering if a Defined Benefit Transfer is right for you.

We offer a full Defined Benefit Transfer service and either myself or the team operate an open information policy. We invite you to call and ask any questions you may have. We can also provide you with an over the phone quotation to administer the transfer for you so feel free to call us. 0844 338 6622

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How is my Defined Benefit Transfer value calculated?

A transfer value is calculated by taking the future pension promise and applying a multiplier. In the past this was usually x 20. For example, a £10,000 a year pension would have a transfer value of £200,000.

However, recently the value of defined benefit transfers has been much higher. In some cases they have been as high as x 36, putting defined benefit transfer values at an all-time high. It is the actuaries of the scheme that set the multiplier to be used, and this can vary depending on the age of the member and how under or over-funded the scheme may be.

Valuations are typically affected by long-term interest rates as these affect a scheme’s ability to meet its obligations. As we have been in a record low period of interest rates for an extended time, this has created deficits in many schemes. This has led to pension providers increasing the transfer value multiplier to encourage members to leave. This alleviates some of the long-term obligations on a scheme.

As interest rates start to recover, the multiplier used may be reduced and this will cause transfer values to fall again. The peak time to maximise the value is unknown. However, in cases we have seen this year, we feel valuations have peaked and some have started to re-correct. So 2017 could be the optimum year for maximum value.

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Is giving up the guaranteed income a Defined Benefit Scheme offers the right thing to do?

This is a great question and it really does depend on the circumstances of each client. For example, a client whose only income is from a defined benefit scheme may wish to keep the guaranteed income, as it is essential to their survival.

However, a client who has other investments such as property and ISA’s may not solely rely on the defined benefit pension income. In this case they might be able to afford to take the risk of the pension fluctuating according to the financial markets.

It is still possible to invest the pension securely and reduce the risk outside of a defined benefit scheme by using professional and proven investment managers. On the up side the income the pension can generate in a bull market can be double what would have been paid as income in the defined benefit scheme.

So in good times income can be very high. However, in a downturn the income can also be reduced. As long as you are financially and psychologically able to ride the highs and lows of the stock market, a defined benefit transfer could be right for you.

To find out more about how you can invest your pension take a look at the following article: Investing your pension

Over the last 15 years, our investment solution has created an annual average return of 10.4% from a balanced portfolio. Although past performance cannot be used to forecast future returns it is good to understand what has been acheived in previous years.

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Once the Defined Benefit transfer has taken place what are the inheritance advantages?

The Achilles heel in defined benefit schemes is the loss of income to a spouse if the member dies before them. Most schemes continue to pay an income to the spouse. However, this is usually 50% less than the original pension in payment.

In many cases this will create an extra financial burden for the surviving spouse, and could result in other assets needing to be sold in order to adjust to the reduced rate of income.

This is not the case once the defined benefit transfer has taken place as the pension will now be classed as a SIPP. Under the SIPP rules the pension can be left to the surviving spouse in its entirety, resulting in no reduction in income. The surviving spouse can continue to make withdrawals as and when needed. Any remaining pension  when they die can be left as an inheritance to their beneficiaries.

Pension inheritance is tax free, up to the lifetime allowance, if the member dies before age 75. If death occurs post age 75 no inheritance tax is paid. However, the beneficiaries will pay income tax on any withdrawals.

For more information on inheritance tax and pensions see the following artilce: Inheritance tax and pensions

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What is the cost of the transfer and the ongoing annual cost of a SIPP and investment management?

Defined benefit transfers are highly regulated and can only be carried out by a qualified financial adviser. The cost of doing this type of business can be expensive for the adviser as there is an increased amount of insurance premium that must be paid to carry out this type of advice.

We operate a sliding scale when it comes to the cost of the transfer and this ranges from 0.5% – 1% of the transfer value. For an over-the-phone quotation on your transfer please contact a member of our team on 0844 338 6622.

The SIPP itself is very cost effective to run. It costs £340 per year with Suffolk Life, one of the UK’s leading providers.

Investment management can vary from company to company. Most of my clients use Quilter Cheviot, one of the UK’s leading discretionary fund managers. Due to the volume of business we place with them we can pass on a 45% discount on their fees to you. (Quilter Cheviot)

You can also choose to add in your annual financial planning fee as well. This creates a holistic solution that leaves you safe in the knowledge that all of your financial planning and investment management is running at its optimum level. Costs can vary subject to the value of the fund. However, typically if you factor in 1% of the fund value per year this will cover the cost of the SIPP, investment management and financial planning.

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What is the process if I want to progress my Defined Benefit transfer?

Before any defined benefit transfer takes place it is an FCA requirement that a TVAS report (Transfer Value Analysis System) be carried out by a regulated financial adviser. The purpose of this is to assess the benefits that you would be giving up should you decide to go ahead with your defined benefit transfer.

We will require some basic information on your pension in order to carry out the TVAS. Once completed an adviser from our pension transfer team will need to make a face-to-face appointment with you to discuss the findings. It will then be down to you to make your final decision.

Next Steps

Should you wish to proceed with the defined benefit transfer, the adviser can complete the relevant paperwork with you and Capital Wealth Partners will manage the entire process of creating the new SIPP for the defined benefit transfer to be paid to.

We can also offer you advice on the best investment managers to invest with, and annual tax planning, to ensure your wider financial planning is covered.

I hope that these five questions have been relevant to you and answered some of the concerns you might have regarding defined benefit transfers.

If you still have additional questions, I would like to invite you to get in touch with a member of our defined benefit transfer team. We will be more than happy to discuss your case further.

0844 338 6622 or via email on info@cwpwealth.co.uk

Alternatively, complete the form below and we will respond to you directly.

Defined Benefit Transfers Enquiry:

Capital Wealth Partners Limited is a company registered in England and Wales and are authorised and regulated by the Financial Conduct Authority.