Sipp

Fleming

I am on final salary with the university and due to retire soon. My financial advisor recommends a SIPP. The pot of money from my pension scheme is £330000 and to set this up is £13000 a cost of 4 per cent Is this excessively high or the average cost?

xylophone

I am on final salary with the university and due to retire soon. My financial advisor recommends a SIPP.

Your IFA is recommending that you transfer out of a final salary DB scheme?

With what justification?

Fleming

The SIPP would make more money than my pension due to average interest of 7 to 10 per cent. He did explain that this isn't guaranteed. He thought due to my Diabetes that my wife and family would be better provided for with having the pot of money.. It's the 4 per cent set up charge that seemed very high.

jamesd

First thing to know is that the situation you described would normally be considered to be exceptionally poor advice that only a scammer would give you. An IFA would be highly likely to be compelled to pay you redress for wrong advice.

So first, who is your financial adviser and are they a real IFA, properly regulated by the FCA to give retirement advice?

The defined benefit schemes like yours are so hugely beneficial to employees that there are very limited circumstances where it is sensible to transfer out without taking a huge loss. Those circumstances include:

1. Diagnosis of a medical condition that gives you a life expectancy of less than a year.
2. Dramatically shorter than normal life expectancy according to an actuary such that you will be able to get more from a personal pension over your limited life than from the original pension.
3. For some schemes, being single when much of the value is in spousal benefits that you will never be received because you're single. But this is a relatively weak case and likely to require help from the other reasons.
4. Not applicable to your situation, when the scheme has high risk of entering the pension protection Fund undue to underfunding and potential insolvency of the employer, and when you have pension entitlements that will be substantially reduced by the cap on PPF payout amount.

Unless at least one of those applies you should be very suspicious indeed about the reason for being told to do this. Even more so if the reason is to do something like invest in South American forests or foreign property.

However, there is one other possibility. By £33,000 do you mean that this is only the lump sum part of your work pension, not all of it? That's not consistent with £13,000 being 4%, though, that would mean a transfer value of £325,000.

The charge is excessive for a legitimate transfer. It's the sort of charge that you might pay to an IFA who knows that they are giving bad advice but is doing it anyway. A couple or three thousand Pounds is more like a reasonable sort of charge, on fixed fee basis not percentage basis. IFA charges are not fixed and do vary between IFAs.

If you think this is a good idea I strongly recommend that you use unbiased.co.uk to find a properly qualified IFA to give you a second opinion. Alternatively, you might send a private message to the IFA who posts here as dunstonh and asking for contact details for dunstonh's business and whether dunstonh might be interested in taking a look at this. From what I know of dunstonh's business model the charge would be more like the one I've described than the one you're being asked to pay. You also would not be advised to do this unless it was really in your best interests.

jamesd

Fleming wrote: »

The SIPP would make more money than my pension due to average interest of 7 to 10 per cent. He did explain that this isn't guaranteed. He thought due to my Diabetes that my wife and family would be better provided for with having the pot of money.. It's the 4 per cent set up charge that seemed very high.

Just how bad is your diabetes? Type 1 or type 2? Smoker, very obese, amputations, kidney disease and eyesight trouble already? Did he get an actuary to work out your life expectancy?

Legitimate pension investments do not generally pay average interest of 7 to 10 percent. The long term return of the UK stock market is more like 5% plus inflation, 8-9% total. To get that you give up an inflation-linked income and spousal pension after your death, I think at half your own rate while alive. It's unlikely to be a good trade for a lot of type 2 diabetics more chance for type 1. To do the job properly the IFA would have needed to get a life expectancy check for you from an actuary. Was that done?

If you're a type 1 diabetic there's a fair chance that this is good advice. Otherwise I have reservations about this unless you're a type 2 with unusually poor outlook.

A good alternative to consider is buying life assurance and paying for that out of the guaranteed income from the workplace pension. You can also invest to accumulate investments that can be inherited after your death.

Aegis

Fleming wrote: »

I am on final salary with the university and due to retire soon. My financial advisor recommends a SIPP. The pot of money from my pension scheme is £330000 and to set this up is £13000 a cost of 4 per cent Is this excessively high or the average cost?

Assuming the advice is sound (which it very probably isn't, especially if your adviser is hinting at returns up to 10% per annum!), the initial fee is ridiculously high. £13,000 for transferring one pension is greedy beyond belief.

Fleming

I have type 1 diabetes but look after myself with no complications. The reply from Jamesd would suggest he was going by 2. Shorter than normal life expectancy. The amount is £330,000 and thanks for noticing this. Transfer value and not lump sum. I never had any life expectancy check carried out.. I will take your advice and get another IFA. Very grateful to you both for your reply.

xylophone

https://forums.moneysavingexpert.com/discussion/comment/66055158#Comment_66055158

See post 6

jamesd

I'm familiar with both types, didn't know which you had so asked for more info. Type 1 is likely to have significantly shorter life expectancy than type 2, particularly if your bg/A1c targets are relaxed to deal with hypos. Good to read that you're not suffering from complications! Given that it is type 1 the transfer advice is not as bad as it could have been but I'd still wonder about the alternative approaches that I mentioned and certainly about getting a substantially lower price!

Given that the USS provides a 50% spousal pension I wonder what your wife is doing about her own pension planning and what her own life expectancy looks like? It seems quite likely to be a better idea for you to stay in USS but to use contributions to her pension as an alternative to what is being suggested.

dunstonh

Did you approach the IFA or did they approach you? (perhaps by using a cold calling company) - lots of scams in the cold calling side at the moment. Often using unregulated companies pretending to be IFAs or giving that impression. Some even use legitimate IFAs to process paperwork whilst it is not actually the IFA that you see.

Death benefits are potentially one of the main reasons that the 5% of cases where it can be justified. However, investment return is rarely seen nowadays. Unless you have been quoted a critical yield (i.e. how much would it need to grow to beat the DB scheme) then forget it. 95% of defined benefit schemes are best left where they are. So, how confident are you that you are in that 5%?

Fleming

I approached him about investing the lump sum. I hadn't heard about SIPP before the initial meeting. Today met with another IFA and he is advising not to get a SIPP and I will now stay in the university pension scheme. I actually feel much better about this as I had a bad feeling about the original financial advisor, especially when he quoted the 13k to set it up.