New regulations from the Financial Conduct Authority (FCA) on pension transfer advice will alter conversations between pension members and advisers, according to Lane Clark & Peacock (LCP) and Royal London.
Since 1 October 2018, financial advisers have had to make their clients aware of how the transfer value they have been offered by their workplace scheme compares with a ‘transfer value comparator’ (TVC).
A TVC is an estimate of the lump sum needed to buy an equivalent pension at retirement to the one being given up, based on the assumption that the money transferred is invested in risk-free assets then used to buy a guaranteed income in the form of an annuity.
LCP and Royal London’s report found that members 10 years from retirement will be offered an average transfer value of 55 per cent of the full value of the pension given up.
LCP partner, Jonathan Camfield commented on the finding: “This does not necessarily mean that transferring is a bad idea, but it does show very clearly that those who transfer out are forgoing a great deal of certainty about their future retirement income and that this certainty is of considerable value”.
However, members within a year of retirement will be offered a transfer value of 75 per cent, on average, of the full value of the pension given up.
Furthermore, the generosity of transfer values are likely to increase over time, other things being equal. This is because most occupational pension schemes are gradually changing their investment mix towards lower risk and lower return assets.
Transfer values differ from scheme to scheme, with some offering transfer values as little as 40 per cent of the full value, while others offer more than 80 per cent of the full value.
Financial advisers surveyed were generally in favour of the FCA’s changes, as most believe it is easier to understand than the old ‘critical yield’ system. They also believe it will not have a major impact on the volume of transfers but would prompt advisers into explaining the amount of risk those transferring should shoulder.
Royal London director of policy, Steve Webb added: “With around 200,000 people having transferred out of a company pension in the last couple of years, and thousands more doing so every week, it is vital that they have a clear understanding both of the advantages of transferring and of the valuable benefits they are giving up”.