Evidence suggest that most pension transfers are carried out in cash but why is this? Is cash easier?
Are the mechanics too complicated to explain to a client or is it that the timescales for in-specie transfers are just too long? The reasons can, of course, be many and varied but wholly legitimate for the case in question.
Anecdotally it seems that cash transfers are fast becoming the norm, even when a transfer of the portfolio in-specie is perfectly possible.
It is believed that up to 25% of pension transfer that take place each year are made without selling the existing holding in a portfolio.
Conversely, 75% are still being made in cash, with the majority of these likely to be from insured personal pensions or occupational pensions and, therefore, cash is the only transfer option available.
However, with self-invested personal pensions (SIPP) recognised as being part of the mainstream, transfers from these schemes should be on the increase and real consideration of the in-specie option is a must for all clients and their advisers.
Let us consider the different variations of an in-specie pension transfer.
These could be:
- Platform A to Platform B
- Platform A to Platform A
- Platform to DFM
- DFM to Platform
Under each of the above it is possible that the SIPP operator remains the same but equally the SIPP operator may change too. This adds an extra layer of administration but it doesn’t need to add extra complexity.
So why not consider an in-specie transfer? Why go for cash? The average time taken for a transfer from a contract-based personal pension scheme, according to HM Treasury, is 16 days.
This may, however, be longer for an in-specie transfer, although ultimately this will depend on the assets within the pension scheme being transferred.
Where assets can be transferred from one scheme to another, the customer outcome must be at the forefront of any decision that is made. Just opting for a cash transfer isn’t necessarily the right option.
After all, there are costs of dis-investing the assets and re-purchasing assets under the new scheme once the cash has been paid.
During this time, the client is out of the market and may pay the price of upward market movements which they could have benefitted from had the stocks been retained.
With an in-specie transfer, the client is only truly out of the market once trade and settlement dates are agreed between the transferring agents and so the transaction can be aborted if absolutely necessary. Retaining the stocks rather than selling means that the portfolio benefits from price improvements throughout the transfer process.
Black hole
Granted, the problem is a lack of transparency once an in-specie transfer is instructed and all parties involved in the transfer process must get better at communicating with advisers and clients alike. The investment manager and the SIPP firm are at the mercy of the custodian, the proverbial perception of stocks disappearing into a ‘black hole’ must be overcome.
The variety of holdings in a portfolio and the different re-registration requirements applying to each and the number of parties involved e.g. trustees, investment managers, custodians, registrars can be problematic.
There is no consistent approach across the board and nothing forcing practitioners to adopt commonality of process or standards but this must change and undoubtedly the regulator will enforce a transfers regime if the industry cannot find a suitable solution.
But let’s not get bogged down by what appears to be negativity around an in-specie transfer.
For example, Origo Services, a transfer agent, have experience of re-registering assets to new providers within a matter of minutes. So, this may be one asset out of many but the systems are getting there and timescales are constantly improving.
Please remember if you are encashing part of the portfolio to re-organise the assets but the rest is in-specie, the cash will come over last.
Also, if the plan is to completely change the make-up of the portfolio then don’t go through the process of an in-specie transfer to then encash once with the new SIPP provider. In that situation, it is much easier and quicker to encash – move the cash over and reinvest.
So the next time a client asks for a recommendation on a pension transfer why not fully consider the in-specie option, even if it is only part of the portfolio that might need retaining. The pension transfer landscape is changing so do watch this space.
Elaine Turtle is director at DP Pensions
The post Cash or in-specie: What’s your pension transfer preference? appeared first on Retirement Planner.