The FSA’s report on pension transfers is expected to lead to a reduction in activity, but advisers say transferring a pension still makes sense for a variety of reasons.
Advisers say the growth in self-invested personal pensions (Sipps) is mainly due to investors becoming fed up with the poor performance of many life company funds.
“The FSA has focused on the problems with transferring a pension, but you have to also look at the problems with existing pensions – such as high charges and poor investment choice,” says Tom McPhail, head of pensions research at Hargreaves Lansdown.
Another reason is consolidation. Investors may have a few pensions scattered around previous employers. Some may also have concerns over the solvency of their employer. Killik & Co says some clients have transferred out of final salary schemes for this reason, even though people are generally best advised to stay in these schemes.
John Lawson, head of pensions policy at Standard Life, says that others transfer to a Sipp because it allows them to borrow money against assets in the fund of up to 50 per cent, which could be an option for those looking to buy equities.
Sipps also offer more flexible death benefits than simply buying an annuity. In income drawdown – which is possible in a Sipp but not in most personal pensions – there is only a 35 per cent charge on the fund on death before it passes to the spouse. With an annuity, the remaining pension fund is lost to the life company.
One criticism levelled against advisers transferring people to Sipps is that clients are paying higher fees for a service they do not need. But not all Sipps have higher fees than personal pensions.
Some low-cost Sipps, which offer less investment flexibility in return for lower fees, will probably charge less than the 1.5 per cent annual charge on a personal pension.
Lawson believes the real problem with pension transfers is not Sipps – where a commission is rarely paid – but people transferring from one personal pension to another, where commission can be up to 7 per cent.
There may also be exit penalties on the existing pension. With-profits funds charge an exit fee, while some personal pensions may have penalties to recoup contract charges.
There can be benefits to staying in an existing scheme too – even if the performance is not stellar.
Malcolm Cuthbert at Killik & Co says some old occupational schemes allow people to take out tax-free cash when they retire of up to 100 per cent of the pension. The normal rate is just 25 per cent. But he believes those wanting to transfer to consolidate their pensions should still consider a personal pension, as some have good performance with low levels of risk.