Think before you leap

lowfox

OK, I'm pretty stupid, but is there anything I can do about this situation? I had a private pension scheme with my last employer, and I'd been contributing for over 13 years. I left that job and my final annual pension income would have been £6.2K at the time I stopped paying into it. I got another job and was sent some fairly cryptic (to me) information about transferring to a local government scheme. Without fully understanding it (oops) I transferred my pension, only to realise after the transfer (which took many months) that 13.5yrs had turned into 4.5yrs, and 6.2K into £2.4K. When I enquired about this they simply said that's the way it was, but seemed unable to say why. They won't tell me what my transfer value was, nor will they give me any other information other than to protest that I gave them permission to do the transfer, which I am aware of. Sure, my own fault because I should have taken expert advice, but not having any interest in pensions, nor the time to research them, I simply assumed it was like transferring money from one bank to another. Except now I know it isn't. So... is there anything I can do, or do I just resign myself to the fact that it's all just disappeared into a black hole? It makes me glad I'm not depending on it to live on when I retire - what a joke.

dunstonh

Its a bit late now i'm afraid and as you didn't take advice, you have no-one but yourself to "complain" to.

When doing a transfer, there is often a penatly from the scheme you are leaving. So asking the value of the pension is not the same as asking for the transfer value. Then you have to find out what the receiving scheme will offer you for that transfer value. It is possible they will take a chunk of the money too as a fee for doing the transfer.

From an advice point of view, transfers are considered high risk and probably half of the potential transfers investigated do not end up being transferred due to charges/penalties and retained benefits/options on the old scheme being better than those offered on the new scheme.

This is one area where getting advice from an IFA is important as the average person just wouldnt know where to look and what to look for. Also the scheme providers are not there to give advice. They act on instructions given.

You may not have lost as much as you think as you may have gone from one final salary scheme basis to another that uses different terms. The value of the "years" with scheme one may match the value of the "years" with scheme two and that is why there is a difference in the "years" given.

lowfox

Thought so, thanks for the reply. Heh, it's only money, right? :rotfl:

deemy2004

This is the problem with pensions .... You find out afterwards that your going to be robbed.... they do it the legal way

yeh I know their wrappers, but would a cash-isa transfer ever result in the value of the funds going from 6k to 2K ? I don't think so.... :rolleyes:

Pal

Yet more ill informed opinion from Deemy, who clearly doesn't understand pensions.

Money invested in a cash fund within a pension wouldn't go down either, but the pension fund would have more money in it. If you then transferred it to another cash fund in another pension arrangement, it wouldn't go down either.

Pal

Pal

Lowfox

The figures you are quoting look a bit harsh, but the explanation is fairly straightforward.

The number of years service has little to do with the pension, except that it is part of the formula for working it out. You cannot compare service in one scheme with service in another to see if one is better than the other.

Your old pension would have been worked out on the day you left as 13.5 years divided by an accrual rate (e.g. 80ths or 60ths), multiplied by your salary. It then increases annually broadly in line with inflation.

The transfer value reflects the current value of the future pension worked out on that basis.

When the transfer value is converted into a benefit in your new scheme, it is based on your current salary and an assumption on your future salary increases. Given that salaries normally increase faster than inflation, you would expect the number of added years in the new scheme to be less than 13.5 years. However if the assumptions turn out to be accurate, the final benefits at date of retirement will be worth exactly the same amount of money. If you are fairly young the number of years could be a lot lower than 13.5 years.

There are other reasons why the benefits could be different, but the main problem is that you are probably comparing apples with pears. Common mistakes include:

- Comparing service periods (e.g. 13.5 yrs to 4.5 yrs). These figures mean nothing by themselves. 13.5 years in one scheme could result in a lower pension than 4.5 years in another if the pension calculation formula are different.

- Comparing projected pensions (at retirement) in the old scheme with fixed pensions at todays date in the new scheme. The latter figure might turn out to be bigger depending upon the increases that happen to each pension between now and retirement age.

- Ignoring other benefit design issues. For example the new scheme might provide a smaller amount of annual pension but might allow you to retire at 60, whereas the previous scheme was designed for you to retire at 65. That is an additional 5 years of payments to be funded from your transfer value.

These complexities are the reason that professional advice is recommended for individuals considering transferring between final salary pension schemes.

As for you losing out, this is almost impossible unless the old scheme was winding up and was underfunded, or was underfunded and reduced your transfer value to stop you taking more than your share out of the pension plan, in which case that should have been disclosed to you before you agreed to transfer. In all other cases the VALUE of the benefits are protected on transfer to another scheme, and they are worth exactly the same amount of money on the day that the transfer takes place.

dunstonh

yeh I know their wrappers, but would a cash-isa transfer ever result in the value of the funds going from 6k to 2K ? I don't think so....

That was either due to charges for a transaction that wasnt investigated first. Or, it may be it hasnt dropped that much. As I said before, it may be that the calculations are different due to the scheme. i.e. 65 retirement age to 60, 80ths to 60ths....

If you proceed with a high risk financial transaction without investigating the costs first, then you cannot blame anyone but yourself. Regardless of what you think of advisors, this is one area that you should always get independent advice on first.

Pal

dunstonh wrote:

That was either due to charges for a transaction that wasnt investigated first. Or, it may be it hasnt dropped that much. As I said before, it may be that the calculations are different due to the scheme. i.e. 65 retirement age to 60, 80ths to 60ths....

This appears to be a transfer between two final salary schemes, and so transaction charges should not come into it. The only possible reduction is if the transfer value was reduced because the scheme was underfunded. If that was the case and lowfox went ahead with the transfer anyway then the outcome was his choice. Reduced transfer values are still fairly unusual though.

More likely it is a case of comparing the wrong figures and/or benefit design being different. Given that transfer to a local authority scheme I assume that the retirement age of 60 played a big part in the apparent reduction in the annual pension payable.

Debt_Free_Chick

Also, many LA schemes tend to offer 80ths plus a lump sum. So, if his current pension is £2.4k it could be that he also has an entitlement to a lump sum of £7.2k.

And, ulitmately, both his pension and lump sum will be based on his final salary (at retirement or date of leaving, if earlier).

Regards

Debt_Free_Chick

For the benefit of those that don't know, there is no "market rate" for valuing a pension in a final salary scheme. It's largely a scheme-specific value that reflects the way in which the scheme is funded. If a scheme is funded on an "optimisitic" basis, then much of the funding is assumed to come from future investment returns. Where the basis is "pessimistic" then the future rates of investment returns are assumed to be lower, so the company puts more in now to compensate for what they think will be lower future returns.

Higher investment returns produce lower transfer values as the rate of future return is used to discount back the amount needed to provide the pension at retirement, to a current day value.

In a way ... the value is always "fair" as it represents what the scheme would otherwise have retained to provide the pension at retirement. Whether that amount would have been sufficient, in the end, is anyone's guess. But what the scheme pays out is the amount it thought it would need.

Regards