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Last Updated: Wednesday, 7 February 2007, 00:30 GMT
Be wary of pension transfer incentives
By Malcolm McLean
Chief Executive, The Pensions Advisory Service

Malcolm McLean
Malcolm McLean
Over the last year, we have had a steady stream of enquiries on our pensions helpline from individuals who had been offered financial incentives from their employers.

The people have been offered inducements to transfer their pension benefits out of the company final salary scheme into some other pension arrangement.

Many of the callers appeared surprised (almost intuitively) that the practice was allowed, questioned its legality, and wanted to know whether it was safe for them to accept their employer's offer of a cash lump sum in return for agreeing to the transfer.

Following representations from ourselves and others, the Pensions Regulator has now issued guidance on this issue for the benefit of pension scheme members, trustees and employers.

In essence, the Regulator has confirmed that the practice is legal.

But in so doing, he has expressed concerns that scheme members must be fully informed about the implications of transferring out of a final salary scheme and about the financial risks involved.

The Regulator has also emphasised the role of the scheme trustees in ensuring members recognise the full impact of what is being asked of them, and that they are encouraged to take independent financial advice wherever possible before proceeding.

Inadequate advice

Our impression is that to date, members have not always been properly advised, while the quality of the information provided has frequently been far from adequate.

In most cases, transferring your pension benefits.... would not generally be in your best long-term interests

Trustees have, in far too many instances, tended to stand back and not involve themselves.

They have stood back even when it has been apparent that they should have intervened, in furtherance of their remit to act in the best interests of their scheme members at all times.

Among other things, trustees should satisfy themselves, where an employer arranges for financial advice to be provided free of charge to the members, that the adviser is truly independent and no pressure is being applied to secure a high proportion of acceptances (as members have told us can happen).

We suspect that for many independent financial advisers (IFAs), this is not business that they are especially keen to take on.

This is because conventional wisdom is that in most cases, transferring your pension benefits from a salary-related defined benefit scheme into a personal pension (which most of these transfers tend to involve) would not generally be in your best long-term interests to do - almost regardless of the level of the cash lump sum on offer.


With a salary-related scheme, there is more certainty on the level of pension ultimately payable - unlike a personal pension, where you are dependent on investment returns and a future unknown level of annuity rates.

We also now have the Pension Protection Fund (PPF), which, in the event of employer insolvency in a salary-related scheme, will step in and ensure members are protected up to 90% of their entitlement - another reason perhaps for not transferring.

And although it may be possible to lodge a complaint later on with the Financial Ombudsman Service (FOS) about wrong or inadequate advice over transferring into a personal pension, there is no guarantee that the claim will be successful or that compensation will be awarded.

In fact, where the transfer is from one company scheme to another, there is, perhaps rather surprisingly, no consumer protection at all, as neither FOS nor the Pensions Ombudsman has jurisdiction in relation to advice given by an IFA in such a situation.

Doing the right thing?

In the circumstances, therefore, it is important that members are as certain as they can be that they are doing the right thing for themselves in responding to the offer.

For most people, resisting the offer of the financial carrot is probably their best option over the long term

It is, in many respects, understandable that employers struggling to fund expensive final salary schemes are seeking all possible ways to reduce their liabilities.

Now that the Regulator has confirmed the legality of such actions, many more may choose to offer these sorts of transfer inducements.

There is little doubt in my mind that for most people, resisting the offer of the financial carrot is probably their best option over the long term.

But you can never say never, and at the end of the day, individuals must decide their own priorities.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

Bob Howard reports on pension transfers for BBC Radio 4's Money Box

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