If you plan to transfer your pension scheme, it is very reasonable to consider its risks. The biggest risk of transferring your pension is market risk. If you’re transferring your UK pension from a Defined Contribution (DC) scheme into a SIPP—which is also a DC scheme—there is the same level of risk inside your UK pension as there is inside your new pension.
The only difference is the portfolio management inside your UK pension if it is invested in government bonds and it is invested conservatively. If you invested into a SIPP solution, an International SIPP, or a QROP, you may have taken a more adventurous outlook or a balanced outlook.
Even though there could be a slight difference between those two, on a like-for-like basis, if you transferred your pension from your UK scheme and you were in the Vanguard 20% life equity fund and inside your new International SIPP you use Vanguard life equity 20% fund, you would have the same level of market risk.
From that respect, there is not a lot of risk when you are transferring DC to DC pensions. The biggest risk for pension transfers comes when you are considering transferring a Defined Benefit (DB) pension, also known as a Final Salary pension scheme.
What are the risks of a DB transfer?
The biggest risk is your DB pot in the UK is guaranteed to continue growing for the remainder of your life. It might not be growing as much as the market is, but it is guaranteed to grow slowly over the course of the years because you have something called index linking.
It means the pension pot is attached to factors such as the consumer price index (CPI) and the retail price index (RPI) to ensure there is always a minimal level of growth inside the pot.
If you transfer your DB into a DC (e.g. International SIPP) and invest in a S&P 500 or S&P 100, you will have market risk. If the market goes down by 20 percent over the course of the financial crisis and you had £500,000 transferred, your pension pot would be worth £500,000. You would lose £100,000.
Despite that, in investments, you would only lose money when you crystallize it. We do not really see this as a huge risk. Anyone who has been through the past two financial crises will know the markets actually recovered from the lows of each crisis within a one-year period.
To illustrate, if you had invested in 2009, you would have made a lot of money. The same situation has occurred with the pandemic. If you were able to invest in Q2 of 2020, you would have made a lot of money over the past 12 months because of the growth that we’ve had after the financial crisis.
We would say that risk is not really that large unless, say, you’re 64 and you want to retire at 65. If you had moved your DB into a DC scheme, and in one year’s time you needed to withdraw all that money.
Client’s perspective
Many clients understandably have concerns over the following: What will happen if the money disappears? What if someone runs off with it? How safe is this scheme?
What is the custodian bank? Where is the money going? How do I know it will arrive in my account safely?
Those doubts are very logical from a client’s perspective.
In our vast years of experience in the industry, we have seen a lot of bad financial advice where funds have performed badly or become illiquid. For example, the adviser who used the fund based out of Bahamas which does rice fields in some exotic part of the world.
Other cases occurred in Spain, where a number of financial advisers used solutions that were far too complex for retail investors e.g., structured notes or products which are not really ideal for retail clients.
There is a level of risk in terms of the underlying investments used. This is something that we will always discuss with our clients. You should always make sure your financial adviser is investing you into plain vanilla and reputable funds in household names such as Vanguard, Baileys, Gifford, Fidelity, BlackRock, etc.
If you cannot find it online or you have never heard of it before, it is probably not a good idea to invest there.
When your adviser puts you into funds or assets which are not appropriate for you or not in line with your risk profile, then it is a risk in itself.
If you have told your adviser that you are a conservative investor and they invest you into a 100% equities portfolio, it is not in line with your risk profile.
You may end up doing better than you should have done because normally the higher amount of equity you have, the more growth you are going to get in the long term. However, over the short term you could get caught out.
If you worry about your money going missing, we assure you based on our years of experience that this instance has never happened. The International SIPP is an FCA-regulated product. It is the same as the UK SIPP. That said, it has to go through the same level of due diligence and application with the FCA.
The money cannot just go missing out of the scheme. Money can only be withdrawn with your signature. The same goes for other products such as QROPS.
Last, we need to make sure you are working with a qualified, regulated, and highly regarded financial adviser or financial advisory firm in this industry.
