Investors warned over pension transfers

Some financial advisers are still telling investors to move their pension from one company to another, just to earn commission – and some pension providers are even encouraging advisers to switch their clients’ plans with the promise of a financial kickback, which comes out of the investor’s pension fund.

These warnings come from the Financial Services Authority (FSA), which last week expressed
concerns about the poor standard of advice being given to investors on pensions transfers.

The regulator has long warned that some advisers may recommend switching simply because it will earn them higher levels of commission – especially if they move their clients’ money into self-invested personal pensions (Sipps). It said last week there had been a “great improvement” in the handling of pension transfers but added that there were still “high levels” of unsuitable advice.

Investors are therefore being advised to check that they are moving their pension assets for the right reasons, and are not losing crucial benefits in the process.

Many investors want to move a pension from one provider to another for a good reason.

Now that many people work for a number of different employers during a career, there are more instances of older investors with pension pots scattered around in different schemes. Advisers say it makes sense to consolidate these various pots with one provider – both for ease of access and to ensure that pension assets are being invested alongside the rest of an investment portfolio in a co-ordinated way.

Many investors also want a wider investment choice than is available through older personal pension contracts – which often give access to just a few life company managed funds.

By contrast, Sipps can give a choice of thousands of funds, as well as listed shares, gilts and commercial property.

But there are certain pitfalls to watch out for when transferring a pension. Exit penalties may apply on existing schemes – for example, pensions invested in with-profits funds.

Benefits can also be lost. Pensions that were built up before 2006 could qualify for special “enhanced protection” if they were already higher than the new lifetime allowance, introduced that year, of £1.5m for a pension pot. But moving the money into a new pension could mean losing this protection by, for example, not being able to take 25 per cent of the original amount out as tax-free cash.

Other older pensions may allow as much as 50 per cent to be taken out as tax-free cash, which can also be a valuable benefit.

Some schemes offer guaranteed annuity rates, which can mean a higher income in retirement, while others offer life assurance. Tom McPhail of advisers Hargreaves Lansdown says it is “almost certainly” not in investors’ interests to move out of a pension that has a guaranteed annuity rate, as the rate is likely to be much higher than they could get on the open market themselves.

Similarly, investors are almost always better off staying in an employer’s final-salary scheme, as their benefits will be locked in at a relatively high level – whereas pensions based on stock market funds come with no guarantees at all.

However, there are exceptions. In the past year, Hargreaves Lansdown has been contacted by a number of British Airways pilots – all of whom were eligible for a generous final-salary pension – because of their fears over the deficit in the BA scheme. If a final-salary pension scheme goes bust, investors will only receive a maximum of £29,749 a year in compensation.

But any transfer to a Sipp needs to be assessed in terms of both the control it can give and the charges it levies.

“Insurance companies have been quite aggressive in saying to advisers: ‘Get everyone to transfer their money into our Sipp and you can earn more money off it.’ In some cases they simply have more charges,” says Richard Harwood, adviser at Brewin Dolphin.

“The excuse was that you’ve taken on a contract that is different and better and allows broader investments. But they can go on to invest them in funds that weren’t significantly different to before.”

Sipps - the alternative volume

Sipps are usually the product of choice for people consolidating their pension arrangements. In many cases, today’s Sipps will have lower charges than older personal pensions. Low-cost Sipps – such as Hargreaves Lansdown’s Vantage product – offer access to over 1,000 managed funds. More expensive Sipps, such as Suffolk Life’s MasterSipp, also give access to listed shares, investment trusts and commercial property. Sipps are often used by wealth management firms that offer clients discretionary management of their money – with regular updates on where the money is invested, rather than an annual pension statement. However, investors need to be sure that they are going to make use of a Sipp’s facilities – particularly if it has higher charges.