1 November 2022

‘Slow Thinking’ Before Transferring Your Pensions

I recently took the family to the Natural History Museum in London, you’d think a day out would allow me to switch off from financial matters, but it seems no matter where we look, there are adverts promoting financial products.

What caught my eye on the train was an offer from a do-it-yourself platform of £250 cash reward for transferring your pensions to them. I noticed a similar offer on social media from a Private Bank, at the opposite end of the market. It is a worrying development in the complex world of pensions.

The main issue with these offers is that they trigger a deep human phycological mode called ‘System 1’ thinking or ‘fast thinking’. It is fast, instinctive, and emotional. You see the offer of £250 cash and the easing of an administrative burden of several pensions from old jobs being consolidated into one. The brain uses ‘fast thinking’ and proceeds to accept the offer. Often poor financial decisions can be traced back to this mode of thinking. The role of a financial planner is to trigger the slower, deliberative, and more logical mode called ‘System 2’ thinking when making these decisions. Why? It significantly reduces the chances of making a mistake.

Our ‘System 2’ approach to pension consolidation is to cover these key questions:

1. What is important to you?

Any advice to transfer must start with where you are, where you are trying to get to and what’s important to you on that journey. Building a mind map is our way of exploring these questions with you.

2. Is your existing pension fit for purpose?

If your existing pension does everything you need it to do, then keeping it where it is would save an unnecessary transfer fee. A detailed analysis of cost, risk, performance, and benefits of your existing pension helps us work out if it is fit for purpose. We also check if transferring would mean losing any valuable guarantees associated with your pension. These can be difficult to identify in paperwork but can be a costly loss if not picked up.

3. Does your pension offer the flexibility you need?

Pension rules have changed considerably over the years, major reforms in 2006 and 2015 means that any pensions contributed to before then, may not have been able to fully adopt the new freedoms offered to pension savings. Your future plans may support a need for additional flexibility in the way that you take a pension income during retirement or how your pension is distributed upon your death. These flexibilities can have a significant impact on the efficiency of your plan.

4. Is there something better or more suitable for you?

Say your plans require more flexibility or your old pension is not fit for purpose, being able to choose a new pension from the wider market is highly likely to provide a better outcome than a restricted list of 1 (like that of a DIY platform or private bank).

5. What if something goes wrong?

Pension transfers often throw up issues that cannot be anticipated but Carbon have invaluable experience dealing with these. Whether it is a simple issue like pension providers dragging their heels over paperwork or something more complex like a valuable guarantee lost upon transfer being found at the last minute, the offer of £250 cash can quickly be eaten up if these curveballs are not dealt with correctly. If something does go wrong, a reputable financial planning firm would put you right, giving you the peace of mind that you are being looked after.

So, it really does pay to use ‘System 2’ thinking with these sorts of decisions, no matter how much offers like the ones we are seeing tempt us into ‘System 1’ thinking.

We can take this psychological thinking into other areas of everyday life too, my museum trip was arranged on the back of a 2 for 1 voucher for an exhibition at the museum. I had not taken account of the cost of a train into London, lunch at the museum, a tantrum from my 15-month year old in the gift shop, the subsequent toy purchase to soothe him and all the other stresses and strains of the day. The reality was, it was all worth it to see his face when we walked into Hintze Hall to see the blue whale skeleton but at least ‘System 2’ thinking would have prepared me better!

The value of investments and the income derived from them can fall as well as rise. You may not get back what you invest.

This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue & Customs practice. You are recommended to seek competent professional advice before taking any action.

Tax and Estate Planning Services are not regulated by the Financial Conduct Authority.

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