Boom in defined benefit (DB) pension transfers
2017 saw a dramatic increase in transfers out of private sector final salaries.
A recent Freedom of Information (FoI) request to the Financial Conduct Authority (FCA) revealed that £20,800 million was transferred last year, up from just £7,900 million in 2016. In total, there were 92,000 transfers, compared to 61,000 in 2016.
There are a variety of factors behind this increase in transfers:
- More and more people are becoming aware of the planning opportunities that are available as a result of the introduction of pension flexibilities. These flexibilities do not apply to DB pension schemes and this can therefore make them look outdated and rigid.
- The appeal of the significant sums involved – the average transfer last year was £226,000.
- Employers’ pension scheme liabilities have grown rapidly due to the low interest rates and the fact that we are living longer. So, employers quietly welcome transfers as a way of reducing these liabilities.
- The proportion of DB schemes that are closing to existing employees is steadily increasing, leaving more people with preserved pension benefits, even if they have not changed jobs.
- One of the major risks to transferring is the fact you are exchanging a seemingly guaranteed benefit for one that is reliant on investment performance. Since 2009 investment markets have been generally benign or buoyant, and the absence of any major market declines has reduced the visibility of this risk.
Clearly, a transfer can be the right choice in certain circumstances, but in many cases it may be best to stay in the DB pension scheme. This is why the FCA continues to require advisers to start with the assumption that transferring a DB pension will be unsuitable.
If you are considering transferring any of your existing pension arrangements, please make sure you talk to us before taking any action. A transfer out of a DB scheme is nearly always a one-way ticket and you need to be sure you fully understand the advantages and disadvantages of the destination before the journey begins.
The value of your investment can go down as well as up and you may not get back the full amount you invested.
Past performance is not a reliable indicator of future performance.
Accessing pension benefits early may impact on levels of retirement income and is not suitable for everyone. You should seek advice to understand your options at retirement.