Transfers out of defined benefit (DB) pension schemes have increased by more than 50% over the past year, with the most common transfer value lying between £250,000 and £500,000 – more than the average UK house price of £216,000 – according to new research
from Royal London. Cited by Citywire
’s Elliot Smith, the mutual insurance firm’s survey of over 800 financial advisers indicates that a large portion of UK clients transferring are in their fifties, with the average transfer value being offered at around 25 to 30 times the value of the annual pension.
The rise in DB pension transfers has been linked to the introduction of pension freedoms in 2015, as “people look to take advantage of reforms”, writes Smith – pension consultancy Aon reported a six-fold increase in the number of pension transfers since 2014. Higher transfer values are also being offered in an attempt to “take pension liabilities off company balance sheets”.
Other drivers behind the increase, according to the survey, include: the ability to have more flexible income in retirement (83%); inheritance considerations (69%); and access to greater tax-free cash (57%). However, concerns such as losing certain income from the DB scheme (81%), investment risk (65%) and poor transfer value (59%) would lead some advisers to recommend against a transfer.
According to Steve Webb, Royal London director of policy, who is quoted by Citywire
, transferring a DB pension into a more flexible format is an appealing option – provided good independent advice is sought – but the process is often lengthy.
“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,” says Webb.
Further research has highlighted concerns surrounding the DB pension transfer value analysis (TVAS) assumptions currently being used by advisers. Rosie Murray-West of FT Adviser
cites figures from investment service firm AJ Bell
, which reveal around 80% of advisers do not believe that “annuities remain the appropriate basis upon which to assess critical yield calculations after pension freedoms”. The study also finds that two-thirds of advisers will only provide guidance on DB transfers as part of a full financial plan, while 99% perform a full attitude to risk assessment.
Ahead of the FCA’s major rule review launch on 21 June, Mike Morrison, head of platform technical at AJ Bell, who is quoted in the article, called on the regulator for greater clarification on DB transfers, labelling the current assumptions “hideously outdated”. According to Morrison, a timeframe for reform is required, with consultation covering three key areas: “whether the assessment of DB to defined contribution transfers must start with the presumption that such a transition will not be in the client’s best interests”; “the appropriateness of TVAS assumptions”; and “clarification of the advice process and charges”.
"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"
However, financial adviser Ashley Clark of Needanadviser.com tells Murray-West that the TVAS are “reasonable”, but stresses that “it is important to consider all of the circumstances before a decision is made”.
FT Adviser article
A new approach
Moving forward, a comparison showing the value of the benefits being given up will be favoured in place of TVAS – the notion put forward in the FCA’s newly released proposals
on advice relating to pension transfers where consumers have safeguarded benefits. These aim to “reflect the current environment and the increased demand for pension transfer advice”, writes Professional Pensions
’ Jonathan Stapleton.
Other major changes include: the need to provide personal recommendations that reflect the client's circumstances, and offer a suggested course of action; revising guidance on evaluating suitability when giving a personal recommendation to convert or transfer safeguarded benefits; and introducing guidance on the role of a pension transfer specialist.
“Our new approach should better equip advisers to give the right advice so that consumers make well informed decisions,” says FCA executive director of strategy and competition, Christopher Woolard, quoted by Stapleton.
While there is still a way to go, these changes represent a strong step forward in the area of pension transfer advice, providing important clarification for both advisers and consumers.
Professional Pensions article
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