Conversation with IFA about DB transfer

Aegis

I don't think this adviser sounds like the right person to use, but it's worth reading the breakdown to see that he's actually only taking 0.5%. As such, it's not 1.48% to him, but about 1% to investment platforms and managers, and 0.5% to the adviser.

Still quite pricey if you prefer DIY portfolios of tracker funds, but let's be entirely fair to the adviser here.

bigadaj

bostonerimus wrote: »

The whole requirement to get an IFA to sign off on a DB transfer really annoys me. I can see how this is supposed to protect the customer, but in many cases it seems like a way to hold the transfer hostage and extract high fees with the excuse that the IFA might get sued for bad advice. For people who can DIY this is a really bad deal and amounts to a completely unnecessary extra tax.

Well considering you are in the us then it's a bit irrelevant whether this annoys you or not.

One of the key issues with these db schemes is that they were primarily funded by employers and the employee would typically put a tiny amount of the contribution in, at least consciously. They are also a cohort that will probably have little experience of handling large sums in general.

The option to transfer out is effectively a perk, people's heads have been turned by huge cetvs and now see this as their right; their right is to receive a benefit as detailed in their contract consisting of a regular payment ar retirement, any other option is a perk.

bigadaj

Aegis wrote: »

I don't think this adviser sounds like the right person to use, but it's worth reading the breakdown to see that he's actually only taking 0.5%. As such, it's not 1.48% to him, but about 1% to investment platforms and managers, and 0.5% to the adviser.

Still quite pricey if you prefer DIY portfolios of tracker funds, but let's be entirely fair to the adviser here.

I'm not sure we want to be entirely fair to the adviser, slightly fair maybe.

Linton

bigadaj wrote: »

Well considering you are in the us then it's a bit irrelevant whether this annoys you or not.

One of the key issues with these db schemes is that they were primarily funded by employers and the employee would typically put a tiny amount of the contribution in, at least consciously. They are also a cohort that will probably have little experience of handling large sums in general.

The option to transfer out is effectively a perk, people's heads have been turned by huge cetvs and now see this as their right; their right is to receive a benefit as detailed in their contract consisting of a regular payment ar retirement, any other option is a perk.

Exactly.

It was I believe an unintended consequence of the new flexibility of DC pensions and the existing rarely used right to transfer out of a DB pension to buy an annuity which would only be worth doing in exceptional circumstances. The imposition of the IFA approval requirement was a last minute attempt to prevent a future mis-selling disaster.

It is strange the criticisms comes from the USA where there seems to be no ability to transfer out of DB schemes.

jamesd

bigadaj wrote: »

The option to transfer out is effectively a perk, people's heads have been turned by huge cetvs and now see this as their right; their right is to receive a benefit as detailed in their contract consisting of a regular payment ar retirement, any other option is a perk.

The schemes are required by law to provide CETVs according to a somewhat specified methodology and pay the money in transfers out. It's not simply a perk, it's the law.

The law doesn't currently require schemes to provide for partial transfers, so almost none do. That pretty much reveals whether schemes think it's a perk they want to offer rather than something they only do because the law compels it.

cloud_dog

Linton wrote: »

It is strange the criticisms comes from the USA where there seems to be no ability to transfer out of DB schemes.

Yes but if they did it would probably be the Carlsberg transfer scheme.

bostonerimus

bigadaj wrote: »

Well considering you are in the us then it's a bit irrelevant whether this annoys you or not.

An opinion from a relatively disinterested party can often be a useful perspective. There's always something to learn when different assumptions and norms are applied to a situation.

bostonerimus

Linton wrote: »

It is strange the criticisms comes from the USA where there seems to be no ability to transfer out of DB schemes.

I don't think that's strange at all. It's perfectly normal to comment on something that is different from your own experience and there's often something to be learned from an opinion that starts from some different assumptions.

However, it is possible to transfer out of DB schemes in the US, but it is generally limited to small amounts and requires the permission of the IRS, the company and the employee. I actually took a buy out from a DB scheme I had about 3 years ago as I had more than enough guaranteed income already. Pension transfer values are calculated using the IRS segmented rate tables and life expectancy tables. I calculated that I would need 5% return from the DC pot to match the pension benefit out to age 85 and so I'm running a 30 year experiment. The money is in a 60/40 multi-asset fund and so far has returned 7%. Importantly there was no cost associated with this transfer. I could easily have paid for advice, but I wasn't forced to pay for something I didn't want or need. In the UK DB transfers might be perk (or legal right) for employees, but they are certainly a perk for financial advisers who more often than not seem to charge some pretty high fees.

I have also done the reverse and bought into my last employer's DB plan just before I retired, again this required permission from the IRS, my employer and myself. I took $280k from my DC pot and bought a $20k index linked pension at age 53 that started at age 55. If you do the maths you'll see what a good deal that was.

bowlhead99

jamesd wrote: »

The schemes are required by law to provide CETVs according to a somewhat specified methodology and pay the money in transfers out. It's not simply a perk, it's the law.

Point taken, it is their 'right' by law to extract the 'cash equivalent' money from their scheme, subject to the regulatory rules.

However, we do see an awful lot of people upset that they can't get their hands on 'their money' without consulting IFA etc, when at no point in their previous of decades of employment did their employer set the expectation that the retirement benefit they were working for was going to be available as a cash lump to spend or invest however they wanted it.

"Back in the day", they were working their x hours a week for y salary and a package of z benefits upon reaching retirement age. The concept of CETV was merely so that if you wanted to roll your package of benefits from an old employer into the new pension benefits from a new employer there was a mechanism to work out how much it would 'buy' if the new employer had different terms. All the annual pension statements would refer to what benefits you had bagged so far and what benefits you would get if you carried on working for the same place until retirement. CETV was not something the typical employee wanted or needed.

I somewhat sympathise with the people who have been faced with high professional costs to move their millions of CETV from a DB plan into a more accessible scheme and might consider this cost leakage as some sort of extra 'tax'. It makes sense that they would be aggrieved that it costs them to do something that they hoped would not cost them anything.

However, whether you call it a legal right or a perk, they are wanting to do something that was not envisaged at the time they started working for the benefit and is something that would presumably improve their situation which is why they want to do it. I find it hard to get weepy for people who have a lot more wealth than the average member of society (with high levels of guaranteed income for life which are out of reach for most), being offered the opportunity to get an better result for themselves that they had originally envisaged - and had not hitherto been part of their planning - by taking it even more flexibly, and then complaining that they have to undergo the 'vetting' procedure for permission to transfer, which costs them something.

This is not to say the fee quotes from specific IFAs versus specific asset sizes and personal situations are fair or unfair. It's just a little moan from me about the number of complainants who feel they are entitled to something that they would never have asked for or grumbled about if it hadn't kindly been put on the table for them.

I could imagine some WASPI woman complaining on the one hand that she wants a state pension at 60 because that's what she thought she'd get three decades ago, and her expectation was set accordingly ; and then complaining on the other hand that she can't cash in her huge DB occupational pension without a professional fee when there was absolutely no expectation when she carried out the work which earned the pension, that it could possibly be delivered to her as a 100% cash lump with total freedom on how to draw it.

So, a moan about moaners

dunstonh

We also need to remember that laws/rules are put in place to cover the long term. The current inflated CETVs are a short term issue. For most of the last 30 years (and probably most of the next 30) it would not be financially best in most peoples interest to transfer out. We just happen to be in a short term window at present where it can be.

We also have to remember that the bulk of people in the UK do not have a clue when it comes to these things. The posters on this website are not representative of the UK general public as a whole.

Advised pensions still run at over 70% of cases. DIY cases also cannot assume that the person knows what they are doing. You can have some very good DIY investors and you can have many making a right pigs ear or it. Or more likely investing above their risk profile, panicking when the next crash comes along and sees their fund value half and they then draw it out in one go, pay massive tax and put it in a savings account which then could see the money run out before death.

So, it may be frustrating for the small minority that do actually know what they are doing. It may be frustrating for the small minority that think they know what they are doing (but dont). However, it is protecting the majority.