A very well-known (and conflicted) Irish fund manager is talking up the idea of cashing in your defined benefit pension scheme.

Bond yields are low, and this is making transfer values attractive, apparently.

I’ll come back to why the fund manager is conflicted later.

But first, why would anybody want to transfer out of a defined benefit pension? I have written a number of articles in this matter which you can see here and here. DB schemes are considered the gold-plated pension – the equivalent of the tracker mortgage. If you have one you hold on to it for dear life.

After all, the DB scheme guarantees a certain income in retirement for as long as you live.

You will never have to worry about living so long that you run out of money or stock market movements wiping out your fund. It is the obligation of the trustees to make sure you continue to receive that defined sum every month come crash or boom.

“But before you rush to make an appointment with a so-called top (conflicted) fund manager in the country, pause for a minute to think this through.”

The minute you sign the waiver there is no going back. Yes, you may receive an attractive transfer value but the responsibility of investing it in a way that will sustain you FOR THE REST OF YOUR LIFE becomes your responsibility.

If that helps you achieve your long-term financial objectives, go for it.

The fund manager will be thrilled to see you coming. He or she will no doubt greet you at the door of the plush office with a couple of investment product brochures for you to peruse. That big transfer value needs to be invested and there are some nice commissions to be earned in the process. If you think I’m being unfair, have a look at the image from the FT a few short weeks ago.

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You need to take a long-term view here. You may get a higher tax-free lump sum by cashing out, but your retirement fund is now limited to that transfer value. With the DB scheme, there is no limit. You live to 104, you get the same annual benefit as you do when you’re 66.

It’s a significant decision because it potentially has major implications for how you and your spouse live your later years.

Remember;

  • If you take a transfer value, the DB spouses pension ends at that point
  • You take responsibility for the investment of your fund if you convert from DB to DC. Not a big deal in most situations, but terms and conditions apply!
  • If you take a transfer from a DB scheme to a DC scheme, the only one that gains without question is your old employer, their ongoing liability ends when you take a transfer. The transfer value should reflect this
  • If you seek advice from the same person that is going to profit from transferring your scheme, make sure that conflict of interest is clearly outlined to you from the beginning. If it’s not, terminate that relationship immediately. Too much is at stake if you take undisclosed conflicted advice.

There has been a significant mis-selling of ‘final-salary’ (DB) pensions in the UK. This mis-selling is inevitably happening here as well. Caveat Emptor.

Bob Quinn of The Money Advisers in Naas

Hi, I am Bob Quinn, a fee-only independent financial adviser in Naas, Co. Kildare.

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