Nearly 400,000 savers have transferred more than £60 billion out of defined benefit (DB) pension schemes in the past three years, according to a Freedom of Information request made by Royal London’s director of policy, Steve Webb.
The number of people transferring out of final salary schemes more than doubled in the 2018/19 tax year with 210,000 savers transferring £34 billion. Four years on from the introduction of pension freedoms, transfers out of older style pension pots are gaining traction.
New rules came into effect in the UK in 2015, which allowed people to move their pension pots out of defined benefit pension or “final salary” schemes to defined contribution pension schemes.
While anyone with more than £30,000 saved must take advice before they can move their money, the Financial Conduct Authority has raised concerns about the standard of advice being given. It is concerned by the number of savers that had been advised to transfer out of DB schemes.
While there are often good reasons to move a pension pot, those who transfer have traded off the safety of a guaranteed income for life under a DB scheme for a lump sum payout and greater flexibility. For example, retirees are able to access funds at an earlier age and there are advantages to those wanting to pass pensions on to the next generation.
But the value of defined contribution schemes is still at the mercy of how well stock market investments perform. Royal London’s Steve Webb, in an interview with Morningstar’s Holly Blacks, says that the decision to transfer out of a DB scheme should be made only after an individual has taken financial advice. He says that even if the lump sum on offer is enticing, that still may be the wrong decision. “Be sure there's a good reason to transfer and start from the assumption that you don't,” says Webb.
Despite the wave of defined benefit pension money shifted over to defined contribution schemes, the value of defined benefit schemes is still more than £1.5 trillion.
There are a number of often complex factors to take into consideration before moving a pension pot. Tom Selby, senior analyst at A J Bell, says that changes to pensions death benefits rules, for example, mean savers with DC schemes can pass on their unused drawdown funds to loved ones tax-free if they die before age 75. For some, this will be the decisive factor, while others may have other sources of stable income and want the flexibility to adjust their income to fit their own personal circumstances.
Steven Cameron, pensions director at Aegon, comments: “Demand for advice in this area remains high and continues to outstrip supply. The FCA has been focused on ensuring advice in this area is of a consistently high standard. At the same time, we need to ensure individuals have access to advice so they can explore their options around how best to use what is often someone’s most significant financial asset.”
The introduction of pension freedoms has also led to rise in the number of scams targeting savers with final salary schemes. Tom Selby adds: “All savers need to beware of scams, and DB members who have recently transferred need to be extremely wary as they are an obvious target for fraudsters. The nature of the pension freedoms meant people over 55 were always going to be a prime target for scammers.”
