Finance / Pension transfers ‘worth more than average home value rise by more than half’
Pension transfers ‘worth more than average home value rise by more than half’
19 June 2017
A surge in pension transfers typically worth more than the value of the average home has taken place over the last year, a survey of financial advisers has found.
Mutual insurer Royal London found a growth of more than 50% in the volume of transfers out of final salary pensions taking place in the last year, with the most common transfer value lying in the £250,000 to £500,000 range.
This compares with an average house price in the UK of £216,000 as at March 2017.
Final salary pensions, which are a type of defined benefit (DB) scheme, are often described as "gold plated" because they give savers a guarantee that they will have a certain level of income when they retire and they have become increasingly scarce.
But they do not have the same flexibilities as defined contribution (DC) schemes. The recent pension freedoms gave over-55s with a DC pension more choice over how they take their pension pot.
DC schemes generally do not have the same advantages that final salary schemes have of the saver ending up with a guaranteed level of retirement income.
The survey found that the vast majority of clients transferring are in their 50s - and the typical cash sum offered is between 25 and 30 times the value of the annual pension given up.
One in four advisers reported that most of the transfers that they deal with are worth 30 to 40 times the annual pension foregone.
More than 800 financial advisers took part in the survey.
Common reasons for transferring included the ability to take a more flexible income in retirement, inheritance considerations and to take money earlier.
Advisers also reported on the main reasons which they give for recommending against a transfer.
The principal concerns were concerns about losing the certain income from the final salary scheme, the risk associated with the transfer was not appropriate for the client and the proposed transfer value represented poor value.
Sir Steve Webb, a former pensions minister who is now director of policy at Royal London, said: “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.”
Advisers also expressed frustration with the length of time it can take to obtain information from schemes in order to provide proper advice on transfers.
Around 500 of the 800 advisers who responded said they sometimes or often had to get a new transfer value quote because a three-month window of validity had lapsed before the advice process could be properly completed.
Royal London is pressing for standardised information to be supplied by schemes alongside transfer value quotes.
Sir Steve continued: “There is no doubt that the ability to transfer a defined benefit pension into a more flexible format is very attractive, provided that the decision to transfer is based on good quality independent advice.
“But sometimes the process takes far too long, through no fault of the adviser. We need a system where pension schemes provide on day one all of the information needed to decide if a transfer is a good idea or not.
“This would make life a lot easier for schemes, advisers and, most importantly of all, consumers.”
Joe Giddens/PA Wire