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Surge in Pension Transfers Thanks to ‘Bumper’ Valuations

Investors look to cash in company pensions, as transfer values now worth more than the average family home

Emma Simon 19 June, 2017 | 3:33PM

The number of people transferring their company pension has soared by 50% in the past year, according to new research from Royal London.

The insurer surveyed more than 800 financial advisers, who said they had seen record numbers looking to transfer out of final salary pension schemes. The average value of these transfers was between £250,000 and £500,000 – according to this research. This is significantly more than the value of the average home (£216,000).

These company pension schemes – also known as defined benefit (DB) pensions – offer employees an earnings-linked pension that is guaranteed for life. These pensions, often described as ‘gold-plated’ pensions, usually offer inflation-linked pension increases in retirement, and will pay a widow or widowers’ pension.

However, those with these type of pension schemes cannot access this money under the new ‘pension freedom’ rules – which allow investors to dip into their pension funds from the age of 55.

Pension Transfer Values Get Brexit Boost

This has led to increased numbers of people looking to switch these company pension into SIPPs, or other personal pensions, so they can cash in some of these funds, or invest in other assets. This trend has also been exacerbated by many company pension increasing transfer values in the wake of the EU Referendum vote. Following the decision to leave the EU, gilt yields fell. This has made it more expensive for pension schemes to provide this guaranteed income – so effectively increasing the value of these pension funds.

The survey found that the vast majority of people transferring DB schemes are in their fifties. Typically, the cash value of these pension funds is between 25 and 30 times the value of the annual income that is guaranteed under these schemes. However, one in four advisers said that they had arranged transfers worth between 30 and 40 times the value of the annual pension that had been foregone.

To put this into some context: if investors had previously been a member of a DB scheme, which had guaranteed to pay an annual pension of £10,000 a year – the transfer value of this fund could be between £250,000 and £400,000.

Think Twice Before Giving Up Guaranteed Benefits

Given the eye-watering sums on offer it is perhaps not surprising that many people are looking to switch and then invest these funds themselves for retirement. But many advisers are warning that this is a “mis-selling scandal waiting to happen” and that people could find themselves a lot worse off in the long run, particularly if investment returns are lower than anticipated.

This research highlighted advisers main concerns. This included: fears about losing a guaranteed income (81%); the investment risk being inappropriate for the client (65%) and the fact that some of these transfer values remained ‘poor value’ (59%).

This research asked what the main reasons were investors gave for switching out of these gold-plated pension schemes.  More than eight out of 10 (83%) said they wanted more flexible income in retirement, and seven out of 10 (73%) cited the large transfer values on offer. Many also said there were inheritance considerations: once the pension is transferred there is the option to leave residual funds to heirs, free of inheritance tax.

Seek Advice About Pension Decisions

Steve Webb, the former Liberal Democrat pensions minister and now director of policy for 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 as irrevocable decision.”

Under pension freedom rules if the transfer value of a DB scheme is worth more than £30,000 investors must get financial advice before transferring these funds. However, even if an adviser warns against a transfer, many people can still go ahead with this option provided they a written evidence that they have sought advice.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author Emma Simon

Emma Simon  is a financial journalist, specialising in investment and consumer issues, writing for Morningstar.co.uk