An important question for many and one that is not likely to be straightforward so let’s look at a real-life case;
 
Paul has heard via his friend (in the pub) that his old company pension scheme is paying large transfer values, and not wanting to miss out, he wasted no time and is now in receipt of a transfer value for £220,000 - for a pension that when he left his employer was just under £4,000p.a.
 
So, excited at this new-found wealth, he wants to transfer this pension scheme as he sees a great deal of money that can be his! He also tells me that the company has changed owners several times and he is worried about his pension if they went bust.
 
Now for some other background information; Paul is in his early fifties and has only got around £100,000 saved in some other personal pensions, so not untypical.
 
Back to the question - what should he do? Well, putting Paul's enthusiasm to one side, the answer will depend on many factors as everyone is different and we need to examine Paul's situation in more detail. Paul describes himself as cautious, yet from a financial planning point of view he is hanging on by the skin of his teeth! He is not really a saver, and his wife is most definitely a spender! A case in point - their planned strategy to pay their mortgage off is to downsize! So on the one hand they are all about the 'lifestyle' but what about when retired, will they be happy to live on a shoe string? I think not, it’s just they have not thought about tomorrow.
 
They could secure their home and retirement by reining in their spending, but they value their ‘lifestyle’ more than their financial security. So, my first question to him is why does he want to transfer and what do they want retirement to look like? Two simple questions which neither of them can answer…
 
My first observation is that they are mesmerised by the transfer value, and the concern that ‘well the company could go bust'. Whilst that may be true, what I explain to Paul is that there is something called the Pension Protection Fund which would guarantee 90% protection, ‘oh!', says Paul, 'okay so my money is safe, but £220,000 – that's a lot of money!’
 
I then ask Paul some other pertinent questions. I need to point out at this stage that Paul is an intelligent chap whom is a director of a medium sized company earning ‘GOOD’ money yet he has not utilised any of the advantages of a pension from a tax planning perspective and as it stands, he will suffer a huge drop in living standards when or even if he could afford to retire.
Now another interesting point raised was - ‘I could transfer the monies into my existing scheme, and it would do better’, and I remark that 'it may do, please tell me what strategy you employ, in terms of growing the fund?'
Pause, he does not know what funds he is invested in or the growth achieved over the last year let along the last 5 years, so how does he know that transferring his pension is right for him and if it will 'do better?'
Most people think their ‘portfolio’s’ perform well, in fact better than everyone else! My experience as an adviser suggests differently, as humans we tend to look through rose tinted glasses.
On the face of it Paul should not transfer his pension as he is motivated for the wrong reasons and doesn't really understand what he has versus what he would be giving up.
This is where an adviser comes in and I would suggest that if Paul has a vision of ‘what retirement would look like’ then this could be the start of a retirement plan. I would not suggest that anyone should transfer their pension without having a clear picture of what their goals are and how this ‘lump of money’ will play into their retirement plan, including how it will be managed up to and during retirement. This should not be underestimated as for many, retirement could now be for 20+ years!
Having deflated Paul's excitement, we agree to have another meeting when he can ‘more confidently’ explain what he would like his financial future to look like.
 
From my position as a qualified pension transfer specialist I can see that in simple terms he has the opportunity to rescue his mortgage repayment plan and build a more secure income in retirement, but will probably need to ‘consult’ for those extra nice bits in retirement. The crucial point for Paul is that he needs to use this opportunity to build a better future for him and his wife.
In relation to Paul and his final salary pension, it may be that the amount of money being offered could be good value but this would need to be fully analysed. He suffers from poor health so the death benefits for his wife could be very valuable if transferred, and he likes to feel in control so these points would require closer inspection to name but a few. Overall though, if Paul does not take an active interest in his pensions and build a plan, either using an adviser or not then a transfer is not likely to be good or successful for him.
 
Author Steven Mufti is a Chartered financial adviser for SMAssociates and advises people on how to best manage their financial assets over the long term.
 

Note to self -tax year end must do list!

• Maximise pension contributions, my recent bonus suffered a lot of tax, maybe some could be better invested in my pension so I can get the tax back!?

 

• Check if I have invested into my ISA, can invest up to £20,000

 

• If I was a rich Dad, gift £4128 in to a junior ISA to pay for children’s university fee’s

 

• Even better gift £4000 for my 18-year-old into a LISA and the tax man gives them a 25% bonus…yippee, then they can use it for a deposit to buy their first home.

 

• Check my tax code, am I getting all my allowances?

 

• It’s been a good year for investments…need to check and sell some to fully utilise my £11,300 ‘tax free’ allowance.

 

• Must tell the father in law, as he is doing well, to look at EIS and VCT schemes so that he can save 30% on income tax.
  

 

• Tell Mum and Dad to equalise their cash holdings so that they both can benefit from the personal savings allowance (PSA) and make sure they have bed and ISA’d £20,000 each of their share portfolio.
  

 

• Tell Grandad and Nan to gift £3000 each, if not to me then at least to the grandchildren, saves 40% inheritance tax.

 
SM & Associates of Ascot are Financial Advisors who look to maximise clients tax planning opportunities which is all part of building client’s wealth. Iffyou would like to discuss how you could potentially make your money work harder and plan for your future call us on 01344-623811