Henry Tapper, chief executive officer for AgeWage, discusses the complexities of pension transfers

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One of the questions I get asked most frequently is whether to transfer a pension. Whether you are a dedicated pension officer or have a wider role in human resources and reward, you likely have dealings with people who are transferring their pensions from one place to another, and you could well be one yourself. This article answers the most common confusions people have and explains why not all pension transfers make sense.

 

The differences between pension pots and pensions

Firstly, let’s work out the difference between a pension pot and a pension. A pot is a sum of money invested to provide a pension in the future, but it’s not a pension. A pension is a regular stream of income, a wage for life designed to last as long as you do.

Next, please forgive me a generalization. Pots can, and should, be transferred so that we have one big pot. If you have lots of little pots when you retire, it is much harder to turn them into a pension. Pensions can also be transferred, but only very rarely and it is generally a bad thing to transfer pension rights to pension pots. As a general rule, transfer pots but don’t transfer pensions.

Worryingly, it’s estimated that some £40 billion has been transferred from pension schemes to pension pots since pension freedoms came into effect in 2015. That’s a lot of money. You could transfer pensions before then, but there seems to have been a big acceleration in interest since 2015, fuelled by people wanting to take advantage of freedoms, generous transfer values and advisers only too keen to help.

The problem is that, while it’s quite hard to get advice on finding, valuing and transferring small pots, it’s been quite easy to find a financial adviser to help you transfer your pension to a pot he or she can manage. And it now appears that around half of those £40 billion of transfers made over the last five years were more in the interests of the adviser than the person whose pension became a pot.

 

Are transfers always the right choice?

The most famous case of transfers going wrong is with the steelworkers who, in 2017, were asked to make choices as to how they wanted their pension paid in the future. For many, it was Hobson’s choice between a pension scheme they had lost trust in, and a government lifeboat pension called the pension protection fund. 7,700 steelworkers elected to convert their pensions to pots and the Financial Conduct Authority (FCA) suggests that around 60% of them shouldn’t have.

The problem has dragged on for four years and now the National Audit Office (NAO) has announced it will be looking into the FCA’s handling of the regulation of the advice given and the compensation that is being offered.

So, what has this got to do with you? Well, if you are a member of the CIPP, your employer may have a defined benefit pension scheme that pays pensions (not pots), and it may be that members have been deciding to transfer pensions to pots. If this is the case, the decision and the advice given may well be under scrutiny. It is unlikely that the pension scheme will want to take back the money it has paid out. It may well be that your staff have been ill-advised (and getting compensation), but most likely that the advice that was given was of high quality and that the transfer was suitable for the person making it.

The NAO’s report, which will follow its investigation next spring, will likely lead to changes in the way these pension transfers are conducted and to changes in compensation when they go wrong. It’s worth bearing this in mind if you have staff who have transferred. While we shouldn’t pre-judge the outcome of the review, it is likely that it will lead to better consumer protection. Your staff may want to hold fire before appointing lawyers (especially on a no-win no-fee basis).

 

How do things look at the moment?

Pension transfers are slowing down, partly because advisers are more wary and partly because people can no longer pay for advice out of their pension pots.

Meanwhile, the transfer of pension pots looks like it is speeding up. The government is encouraging people to combine their pension pots by making pensions easier to understand. We are soon to have simpler pension statements which will be issued in a pension season, and the hope is that by 2024, we will be able to see all our pensions and pension pots on a pension dashboard - which should make it much easier to manage our pots into one big pot and for us to work out our retirement finances without need of a financial adviser.

Many people will, of course, want to use a good financial adviser, but as with tax-returns, the option to do it yourself looks a lot cheaper for those with simple affairs.

So, to sum up, pension pots are on the move and we are encouraged to combine them. Pension transfers are slowing down and we are encouraged not to transfer and to seek redress if we feel we have been badly advised. These may seem mixed messages and they are. Sadly pensions are far too complicated, fortunately there are people like you who are there to help people understand. I hope this article has helped you understand. 

• Policy article
• Professional magazine