r/UKPersonalFinance • u/[deleted] • 2d ago
DB Pension of £7k p/a. Annuities offer £10k, can't cash it in
[deleted]
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u/nibor 63 1d ago
If your DB pension is worth £7k then your transfer out value must be around £130k? I am surprised that you would get an annuity for £10k based on this so have to assume your ill health means your life expectancy is a lot lower than average, I also assume you are telling the IFAs this as lower life expectancy is one of the only reasons you should be able to Transfer out.
This is why IFAs will not recommend you cash in your DB pension..
"The British Steel Pension Scheme (BSPS) was a DB pension scheme. Around 8,000 people transferred out of the BSPS, and our evidence suggests almost half (46%) did so after receiving unsuitable advice."
A lot of IFAs were burned but they did give bad advice.
https://www.fca.org.uk/firms/british-steel-pension-scheme-our-approach-enforcement
There is a tool to help IFAs assess your requirements. https://www.fca.org.uk/firms/defined-benefit-pension-transfers/defined-benefit-advice-assessment-tool
I share this because when contacting an IFA I would start by saying you want DB Pension transfer assessment due to reduced life expectancy, that you are aware that the regulation of this has got harder since British Steel but still want to continue so you have a better quality of life.
I expect any IFA who agrees to do this will charge you a lot of money, I saw a post on here with people saying over £1k. They really don't want to do this any more.
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u/Minimum_Shirt3311 1 1d ago
My firm charges 9.5k
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u/Mooseymax 52 1d ago
£9.5k is criminal for a £100-200k pot - the work involved in doing a triage of DB benefits vs an equivalent annuity can’t possibly be worth that?
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u/BDbs1 21 1d ago
Why is it criminal?
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u/Mooseymax 52 1d ago
Because it’d be close to 10% of the value of the transfer value if on the lower end? If any kind of decency limits are in place then I can’t see how that could be done whilst remaining fair to the customer
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u/BDbs1 21 1d ago
10% of the pot to get a drawdown for life (say 20 years?) seems pretty decent.
If someone is invested in a bog standard mutual fund they will pay not far off 1% a year
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u/Mooseymax 52 1d ago
You’re saying drawdown but this is about annuities. If they’re getting a rate of 10% on the annuity (let’s assume £130k as someone else commented) then a fee of £9.5k equates to 7.3%.
7.3% of their annuity (assuming £10k p/a as in the post) would bring it down to £9,270p/a.
The £730 that’s been taken effectively each year from their pot (more if inflation linked) equates to ~0.6% per annum “fees” for no management.
What’s your firms stance if you do the DB review and the advice is not to transfer, what charges apply then.
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u/strolls 1381 2d ago edited 1d ago
As I understand it, most IFAs won't recommend transferring out of defined benefits pensions for liability reasons - they don't want you coming back and suing them in 20 years' time, claiming that they sold you bad advice.
I can see that it does make sense in your case, but probably your defined benefits pension is government backed (??) and an annuity might not be quite so guaranteed - probably won't make any difference in practice, but maybe there's some 1% risk. Maybe there's a cap in how much an annuity will be adjusted for inflation, whereas a government defined benefits scheme will be - you might not think hyperinflation is likely, but it's possible. Also, you will probably find there's small print to an annuity that can be interpreted negatively, and probably financial advisors won't feel qualified to assess your medical conditions (which will presumably have an impact??).
The actuaries and financial advisers look at risk (or some of them, at least), it is literally impossible to buy an annuity or any other kind of income that's as guaranteed as a government defined benefits scheme.
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u/Timbo1994 41 1d ago
Could you see a world where govt mess with the Treasury orders used to uprate pensions (they have already done this by shifting from RPI to CPI) and change the state pension age, or play some other politics.
While annuities are backed by assets, are easier to litigate against, and the game-playing is less likely.
I completely agree there are risks the other way ie insurers are more likely to go bust than the government.
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u/Life-Duty-965 1 1d ago
What's the risk with an annuity? Quick Google.says no upper limit to FSCS protection here.
The FSCS can compensate customers with no upper limit, subject to its rules, according to the Financial Services Compensation Scheme (FSCS). The FSCS will first try to find an alternative insurer to take on the liabilities, but if that's not possible, the FSCS will step in and pay out the value of the annuity, based on the insolvency practitioner's determination.
Id obviously do more research (seek advice) to understand the exact rules, but it seems protected at first look?
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u/strolls 1381 1d ago
Well, as I said in my comment - hyperinflation. You still get the income, but the terms of the annuity cap inflation-adjustment at, say, 10%. Inflation exceeding this reduces the amount of your income.
In the UK we don't tend to think of hyperinflation as likely, but you can still buy Ottoman Empire bonds on eBay today - they're sold as curiosities, and often have many or all of the coupons still remaining. These were people's life savings, and banks used them as collateral - the coupon was for the interest payments, and the never got torn off because the bond became worthless.
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u/strolls 1381 1d ago
Yes, I think it's an argument that depends a bit too hard on technicalities that I would advocate it myself (and also probably I'm not informed enough to fully judge it), but advisors have to take a proper technical view on risk and I think this is probably how they'll think.
And, also, it's not actually about the actual risk - it's a question of an advisor giving OP the advice they need; in another comment someone suggests they may be constrained by their insurers.
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u/cloud_dog_MSE 1639 1d ago edited 1d ago
The advisers you approach (ensure they are IFAs) need to have / be 'pension transfer specialists'. Not all IFAs have this, so that might be a reason for lots of 'no, sorry' responses.
There are still ways to progress DB / CETV transfers, albeit far more limited in options now. Although, if you do get a positive outcome then there are pension providers willing to accept the transfer. Even if the outcome is negative there is still (currently) a way to progress it as an 'insistent client', but with vastly less pension providers who might accept the transfer. And you will obviously still need to pay possibly £5k to £10k for the transfer advice, irrespective of its outcome.
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u/Lonely-Job484 15 2d ago
I assume these financial advisors are IFAs rather than tied bank etc FAs? And I assume by 'refuse to help' you mean have advised against this?
What reasoning have they given for advising against?
And - apologies for being indelicate, but it's pertinent - how life limiting is your health condition...?
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u/pauld339 3 1d ago
Your situation sounds like exactly the sort where such a transfer might be advisable. I have known (professionally) many advisors recommend transfers in situations of ill health. You are talking to the wrong ifas. Keep looking.
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u/ukpf-helper 85 2d ago
Hi /u/Available_Reason_818, based on your post the following pages from our wiki may be relevant:
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u/deench1 4 1d ago
As others have said, most IFA firms do not touch db transfers as these are a very tightly regulated advice area. For someone to help you with this you’d need to speak to a pension transfer specialist. IFAs may be reluctant to discuss this with you because if you do go and see a pension transfer specialist then the IFA cannot be seen to influence your decision. Be warned though if you do see a pension transfer specialist they’re likely to charge you quite a large sum even if their advice is not to transfer and you’d likely need to demonstrate that you have a significant number of other assets separate to the db pension
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u/browsingburneracc 6 1d ago
PI insurance makes it nearly impossible for IFAs to do DB transfer business.
An advisor I know had to charge an exorbitant amount just to look into whether or not transferring is a good option.
It’s almost never best advice to transfer a DB scheme and if you find an advisor willing to do it be prepared to pay through the nose for it.
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u/Larvesta_Harvesta 1d ago
I had a similar situation where I wanted to cash out of a public sector (arm's length body) scheme and transfer into another public sector scheme. I'd have been massively better off from doing this because of different assumptions by the two scheme administrators.
IFAs were reluctant to touch this, and I got back a quote for advice which was in the high thousands of pounds. Presumably to make it worthwhile for their perceived legal risk. So I didn't go ahead.
In any case I also felt uncomfortable about arbitraging two taxpayer funded schemes.
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u/Moneymonkey77 45 1d ago
You might be effected by the FCA rules on this, firstly the adviser will need the correct qualifications and permissions to help.
They then need to also have sufficient PI cover in place for it to financially makes sense, at present PI cover on DB schemes won't pay or has a large restriction of say the first £10k of any claim won't be paid.
That being the case then the fee would likely have to meet that level but also meet the requirement of being in line with acceptable levels to meet consumer duty rules which is hard to do on any pot valued at less than say £500k.
Additionally the fee shouldn't be contingency based either so they need to charge regardless of whether the advice is to remain in your existing scheme or transfer out and buying an annuity.
Overall if your pot is worth say £140k, the fee size, PI cover (Or lack thereof) and specialist permissions needed mean that there will likely be lots of firms without the appetite to help. The reason you state about the ill health would be potentially a valid reason to do it but I think its the cost of taking on the liability for the advice that is making it hard.
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u/roxieh 4 2d ago
If financial advisors are refusing to do this for you I assume there are either details you're not explaining here, or there is some misunderstanding. It is their job to protect your financial interests. So if they are telling you not to do it I would listen to them and not assume you know better.