The volume of transfers out of final salary pension schemes has grown by more than 50 per cent in the last year, Royal London has found.
According to a survey of more than 800 financial advisers, the most common transfer value out of defined benefit pension schemes is between £250,000 and £500,000, more than the average UK house price of £216,000 as at March 2017.
Royal London noted that the majority of clients transferring are in their fifties, with the typical cash sum offered being between twenty five and thirty time the value of the annual pension given up. While one in four advisers stated that most of the transfers that they have overseen are worth thirty to forty times the annual pension they are leaving.
Advisers explained that the main reasons for people who had received advice and went ahead with the transfer were: the ability to provide more flexible income in retirement (83%), large current transfer values (78%), inheritance considerations (69%), access to greater tax-free cash (57%) and to take benefits earlier than in their DB scheme (44%).
In contrast, advisers said the main reasons which they give for recommending against a transfer are: concerns about losing the certain income from the DB scheme (81%), investment risk associated with the transfer being not appropriate for the client (65%) and transfer values representing ‘poor value’ (59%).
Royal London director of policy Steve Webb 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.
“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.”
Furthermore, Equifax Touchstone recently found that new pension investments, excluding transfers, rose by over a third, 36.8 per cent during Q1 2017, rising to £6.8bn from £5bn in Q4 2016. New inflows for the quarter were also more than twice as high year-on-year, rising by 55.4 per cent, £4.4bn from Q1 2016.
The data, which looked at over 90 per cent of the UK’s life and pensions companies, revealed that total pension investments, including transfers, for Q1 2017 reached £12.4bn, up 30.3 per cent on the previous quarter.
Equifax Touchstone noted the continued investor desire to switch to products that better suit their retirement needs. Transfers across all products increased by 23.3 per cent to £5.6bn.
Equifax Touchstone director John Driscoll said: “It’s encouraging to see such a positive start to 2017, well up on levels seen in 2016. Growth in pension inflows has proved resilient to political uncertainty and it will be interesting to see if concerns about whether stock markets are due a correction will start to impact inflows for the rest of the year.
“Advisers are receiving increasing requests from clients to opt out of their final salary scheme. As investors continue to weigh up the benefits of a guaranteed final salary pension, versus flexible access to their retirement savings, it’s likely this behaviour will follow through into the next quarter. Pension transfer volumes will continue the upward trend as ‘insistent clients’ give greater weight to flexibility in their financial planning.”
