Consumers warned over “risky” DB transfer investments
On the 3rd of December 2017, the website Money Marketing reported recent warnings from the Financial Conduct Authority (FCA) about the care needed when agreeing to transfer your defined benefits (DB) pension pot to a defined contributions (DC) scheme.
At Independent Pensions Specialists Ltd, we support the FCA’s warnings, which we believe are timely – if for no other reason than the members of many pension schemes appear to know so little about their current arrangements and the new investments into which they may be encouraged to transfer their funds.
Our concern is that members of defined benefit or defined contribution schemes may be tempted by offers to review their current arrangements and transfer their funds to investments promising returns that appear almost too good to be true. The problem is that many of those investments may be just that – not only too good to be true, but outright scams.
Consumers are warned by the FCA to steer clear of those investments appearing to offer guaranteed returns or lump sums of cash in sectors such as overseas property, care homes, storage units, forestry or biofuels.
What makes DB scheme members potential targets?
If you do not understand how your pension works, the benefits to which you are entitled, and the value of your accrued pension pot at any one time, you may be vulnerable to any offer which promises to improve your current position.
That is why it is critical to take an active interest in your pension and understand its value to you now and into the future when it is in payment during your retirement.
For reliable advice on your current pension arrangements and your options for making sure that your pension continues to work in your best financial interests for many years to come, you may need the advice of a reputable, independent financial adviser. For that purpose, consult us here at Independent Pension Specialists Limited (IPSL), where we will review your pension arrangements in depth, help explain its benefits to you, and lay out some of the options for making it work harder for you.
Types of private pension schemes
The first step to understanding your pension arrangements is knowing whether it is a defined contribution (DC) or defined benefit (DB) scheme:
Defined contribution (DC)
- also called “money purchase” schemes, they may be arranged by your employer, or you may subscribe to your own private pension scheme;
- your contributions are used to fund investments in stocks and shares, and the value of your pension pot is determined by how much you pay in and the performance of the investments made;
- these are becoming more widespread than defined benefit schemes and are the investment vehicles into which you might be tempted to transfer the value of your defined benefit pension;
Defined benefit (DB)
- also known as “final salary” or “average salary” schemes, these are pensions which provide an income based on the salary you received from your employer and the number of years you worked there;
- since your pension income is not dependent on the performance of any underlying investments, they may be considered a more dependable solution than any defined contribution scheme – whose benefits do not “even come close” to those of a defined benefit scheme, says the magazine of the Institute & Faculty of Actuaries, the Actuary.
Very careful thought needs to be given, and professional advice sought, therefore, before you consider transferring your defined benefit or DB pension rights to a defined contribution or DC scheme. Please contact us if you have any questions or require advice on pension transfers.
The data used in this article is correct at the time of writing.