A recent announcement by The Pensions Regulator in the UK has stated that almost 400,000 people have chosen to transfer out of Defined Benefit pension schemes, also known as Final Salary pension schemes, in the UK since 2016.
The report showed that 390,000 people have transferred out a total amount, to date, of 60 billion GBP.
Over 200,000 people have reportedly transferred out of DB schemes in the last year alone.
Defined Benefit schemes have traditionally been looked upon as the most generous types of UK pension provision. They provide a ‘guaranteed’ income throughout retirement for the member and their financial dependents. So why such high numbers of transfers out?
There are many reasons why transferring out can seem like a good option. High profile cases of major companies going into administration have resulted in members’ pension benefits being drastically reduced – so removing this risk by taking the money and placing it elsewhere is an attractive option from a peace of mind point of view.
Defined Benefit pensions also do not offer much flexibility either in retirement or upon death. Defined Contribution schemes and personal pensions are generally much for flexible to the investor both in terms of how the money remains invested and how the benefits can be taken.
The question of flexibility is amplified for individuals that may plan to retire overseas since, with some personal pension solutions, the currency denomination of the pension can be converted as and when suitable, and retirement income can be received gross and treated locally in terms of taxation rather than being paid net of UK tax at source.
Whether transferring is the right thing for an individual to do depends entirely on their circumstances so unless you look at each case in isolation it is impossible to say that there is a blanket right or wrong option.
Advice is Essential
Individuals must be aware that if a total pension transfer value exceeds 30,000 GBP then it is a legal requirement to take independent financial advice from an FCA regulated adviser with specific authorisation to give Pension Transfer advice. This simply refers to the total fund value, not the projected annual income, so most pensions where the member has given at least a handful of years’ service to a firm will sit above that threshold.
This rule is there to protect the member and ensure that they can make an informed decision.
What About the Ceding Scheme?
For the Scheme and the Sponsoring employer (known as the Ceding Scheme in the case of a transfer), transfers out are also generally seen as a positive thing. It helps to reduce liability and overall long-term investment and mortality risk within the Scheme and some employers even offer enhanced transfer values to encourage and increase the number of individuals transferring out of their scheme.
Here at Hoxton Capital we have handled numerous cases for clients where surprisingly high multipliers have been applied in the Cash Equivalent Transfer Value calculation and thus the value being offered has represented an extremely attractive option.
Such enhanced values won’t be available for ever, but given the current low gilt yield, which inflates the value of DB transfers, then transfers out from DB schemes are unlikely to slow down any time soon.
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