Can I Transfer My Final Salary Scheme to My Existing UK SIPP?
Is it possible to transfer your Final Salary scheme to your current UK SIPP? And can you just sign the paperwork and call it a day? These are some of the concerns of our clients who have a Self-Invested Personal Pension Scheme on their own, as well as some clients who want to transfer their existing DB pension scheme into a SIPP.
We would say that many of our clients wanted to make the transfer as soon as possible; they wanted to simplify things by merely signing the papers and getting everything done promptly.
Yes, you have the option of transferring your DB pension scheme to your current UK SIPP, however, it is not as simple as it seems. We must go through a very complex and comprehensive process. For Final Salary pension transfers, we must first ascertain whether you are a UK resident or not. However, we must also determine if it is indeed in your best interests to transfer your Final Salary scheme.
The following stage is to evaluate your cash equivalent transfer value (CETV). This is the cash value offered by the scheme in return for giving up your Defined Benefit pension entitlements. You can obtain this information by contacting your plan administrator or pension provider. They may ask you to do this in writing and provide you with a form to fill out. If you qualify for a CETV, you must get it within three months of requesting a transfer value. From this standpoint, you may easily assume that the transfer process is more time-consuming than it seems.
On the other side, if you are a member of the Final Salary scheme and have safeguarded benefits worth more than £30,000 under the scheme, you must get financial advice before proceeding. You can watch an explanation by our CEO and Independent Financial Advisor, Dominic James Murray about transferring your Final Salary Pension to your UK SIPP.
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At What Point Do I Need A Financial Advisor?
The reason for this is because HMRC and the FCA—as a pension regulating body—have put in place extremely strict rules requiring you to speak with your financial adviser and get financial advice if you have a safeguarded benefit of more than £30,000.
Section 48 of the Pension Schemes Act 2015 and its accompanying rules require pension plan members who have existing rights to safeguarded benefits, also called pension guarantees, worth more than £30,000 under the scheme to receive suitable independent advice from an FCA approved adviser before:
- Changing protected benefits into flexible benefits (or, in the case of benefits which are both safeguarded and flexible, into different flexible benefits).
- Using a transfer payment for safeguarded benefits to get flexible benefits under a different plan.
- Receiving an “uncrystallized funds pension lump sum” (UFPLS) for their safeguarded benefits.
What Are Pension Guarantees?
According to the government, safeguarded benefits or pension guarantees are any benefits that include some type of guarantee or promise throughout the accumulation period concerning the rate of secure pension income that the member would get or have the opportunity to receive. These include:
- A guaranteed amount of income computed by reference to the member's pensionable service in the employment of the pension scheme's sponsoring employer under an Occupational pension scheme (for instance, under a Final Salary scheme).
- A guaranteed minimum level of income is calculated in relation to the contributions or premiums paid by or on behalf of the member.
- A guaranteed minimum rate at which the member will have the choice to convert their collected pot or fund into an income in the future, usually when the member reaches a certain age (generally known as a guaranteed annuity rate, or guaranteed annuity option).
How Long Does A Pension Transfer Take?
The initial transfer process might take between three to six to nine months. The UK government's new legislation, which was released in November 2021, will place significant roadblocks in the way of DB pension plan members exercising their statutory right to transfer.
Section 125 of the Pension Schemes Act 2021 establishes new trustee requirements that will require inspections to be performed before executing a transfer. Concerns may trigger amber flags, forcing a member to seek financial advice, or red flags, allowing the governing body to halt the transfer.
Transfers to authorized master trusts, authorized collective defined contribution schemes, and public service schemes can be made without further scrutiny. Trustees and providers can also keep a ‘green flag' of personal pension plans that they have reason to believe are not being exploited for fraudulent purposes. Other transfers will necessitate trustees to investigate proof of employment relationships to recipient occupational pension plans.
This implies that the statutory right to transfer is effectively being eliminated and will be replaced by a red and amber flag system that will be implemented. That means the transfer process that normally takes three to six months will now take six to nine months. Read more about Final Salary Pension transfer process here.
What Are The Advantages of Working With The Financial Advisor?
We at Cameron James, as qualified financial advisers who do all the cost spreadsheets, can tell you that it's simply not worth it for advisory firms to do transfers for individuals on an initial basis while having no ongoing assets under management, or no way to make money from the client in the future.
But we're a company; we manage people's portfolios on an ongoing basis for a charge, but the growth and diversity that we provide to our customers is generally better than what they would achieve inside their own UK SIPP. So, this is what it looks like from a business standpoint.
In terms of the charge that is paid, we are confident that every pound you spend is worth spending. As financial advisers, we have an independent and qualified framework in place to identify how and where your money will be invested. Over time, we have also carefully examined every aspect of the situation, and we have researched how we manage your pension funds.
Another advantage is the return on investment. The cost at Cameron James is one percent per annum, and our annualized return on portfolios over the last five years has been 16-18 percent annually. We don't think paying 1% to achieve 16% growth is a huge deal, and at the end of the year, you can compare it to your self-managed investment with your SIPP.
As an example, assume you have a pension plan of one million pounds on your existing DB Scheme and want to transfer it to your existing UK SIPP. You had a 14% return on your investment that you managed yourself with your UK SIPP over the year. The fact that you've put your money into companies on the “hot list,” such as TESLA or Amazon. We believe it is a good decision made by you.
On the other hand, if we had 16 percent and you paid us one percent, you'd still have 15 percent net, compared to maybe 14 percent if you managed it yourself. So, after the first year, you can examine it and maybe even take some suggestions from us about what we're doing inside your portfolio that we're managing that you could do independently.
However, if your assets are worth more than £30,000, you must get advice from a qualified Independent Financial Adviser. As previously said, the objective for this is to ensure that your money is spent appropriately and that you are fully aware of each of the options available to you.
The government does not allow people to manage the pension pool on their own without initial guidance to ensure that it is properly invested and appropriately diversified. There are a couple of reasons for this. First, during the first 12 months after executing a Final Salary pension transfer, we as the financial adviser must be able to demonstrate that we have considered where the money is placed. This is critical because many advisers will say, “We're investing your pension funds into Vanguard and fidelity low-cost passive ETFs, an excellent portfolio,” and then they will go and invest it in a lot of commission-based funds that cost you a lot of money.
With new regulations, the FCA is increasingly focusing on this, so there's a time of policing when we need to prove to the FCA that the money the members transferred in is invested appropriately and safely and that the members clearly understand any risks that may arise in the future.
Now that you have a good understanding of transferring your Final Salary Pension to your existing UK SIPP as well as important reasons why you should work with an FCA-qualified IFA, you can book yourself for a free initial call with one of our qualified IFAs through the button below.