Surge in DB pension transfers which are worth more than people’s homes

Transfers out of defined benefit (DB) pensions have gone up in volume by 50 per cent in 2016, according to insurer Royal London, which surveyed 800 financial advisers.

The survey also found that the most common transfer values ranged from £250,000 to £500,000, larger than the average value of a UK home (the average UK house price was £220,000 in April 2017, according to Land Registry data). 

The survey also found that the majority of clients transferring are in their 50s. The typical cash sum offered is between 25 and 30 times the value of the annual pension given up. However, one in four advisers reported that most of the transfers that they deal with are worth 30 to 40 times the annual pension foregone.

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When respondents who had received advice were asked why they wanted to go ahead with the transfer, the following were the top five reasons: The ability to provide more flexible income in retirement (83 per cent), large current transfer values (78 per cent), inheritance considerations (69 per cent), access to greater tax-free cash (57 per cent), and the ability to take benefits earlier than in the DB scheme (44 per cent).

The main reasons advisers gave for recommending against a transfer were concerns about losing the guaranteed income from the DB scheme (81 per cent), investment risk associated with the transfer being inappropriate for the client (65 per cent), and the transfer value representing ‘poor value’ (59 per cent).

Steve Webb, director of policy at Royal London, comments on the findings: ‘It is clear that large and growing numbers of people are choosing to exchange the promise of a regular pension in retirement for a large cash lump sum.

‘For some people, the value of their pension pot will be greater than the value of their house. This makes it all the more important that people think very carefully before making a transfer, and take full account of independent financial advice before making such an irrevocable decision’.

Around 500 of the 800 advisers also expressed frustration with the length of time it can take to obtain information from schemes to provide proper advice on transfers.

As a result, seven out of eight said that they ‘strongly supported’ an initiative by Royal London to press for standardised information to be supplied by schemes alongside transfer value quotes.

Sankar Mahalingham, head of DB growth at Xafinity, comments: ‘The research from Royal London reflects what Xafinity has found from its own experience – both that there has been a huge surge in actual transfer values out in the last year and that transfer values remain at high levels.

‘It is not surprising that the vast majority of transferring members are in their 50s, as members are able to start accessing their benefits from their mid-50s onwards. Many members may not be aware that their pension pot could in fact be worth more than the value of their home; therefore any options around how the benefits could be taken must be considered extremely carefully, with appropriate independent financial advice.’

Claire Trott, head of pensions strategy at Technical Connection, says: ‘There are a great number of considerations when looking at something as significant as a DB transfer. Many will have seen [details of] high-profile transfers in the press, such as Ros Altmann’s, and feel that they should be able to just access the funds.

‘However, many of those looking to do a DB transfer have little or no investment experience so will need ongoing help, or the funds, however large, will wither over time and not provide the benefits expected by the client.’

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