In retirement, most people would like to have two things. First, a secure income to provide peace of mind, especially in the later years of life. Second, a capital sum, whether to pay off outstanding debts, to meet unexpected bills, to help the next generation or simply to enjoy. The best mix of income and capital will depend on individual circumstances and preferences.
However, there is no guarantee that the pension wealth which an individual builds up over the course of their working life will deliver the mix of regular income and of capital that they want. The pension wealth which individuals build up will largely be a function of the type of workplace pension provision in the different jobs they held. Most people arrive at retirement with multiple pensions from different arrangements and many will have a mix of a regular secure income from a Defined Benefit arrangement and a capital sum from one or more Defined Contribution pensions.
There are, of course, already ways in which people can turn retirement income into capital and vice versa.
Until the advent of ‘pension freedoms’ in 2015, the presumption was that regular income would – and should – be the priority for most. Those who reached retirement with DC pension pots were therefore generally expected to turn a substantial part of them into regular income via an annuity. Meanwhile, within the DB world, the ability to turn a proportion of the value of a DB pension into a tax-free lump sum has also been relatively standard.
But pension freedoms acknowledged that individuals should be able to choose the right mix between income and capital. In particular, the 2015 changes heralded a boost in the number of people transferring out of DB pensions into DC arrangements.
These freedoms have been hugely popular but also highly controversial. Whilst many people have been offered large sums to give up their DB rights and have been pleased with the outcome, others now regret transferring, especially where the advice they received was of poor quality.
One problem is that in too many cases these transfers are on an all-or-nothing basis. For those with long service in a single scheme, this is a particular challenge. They may want the freedom of a capital sum but without sacrificing all of the certainty of a guaranteed income.
LCP and Royal London have therefore combined to produce a new policy paper on whether ‘partial’ DB transfers could offer ‘the best of both worlds’. The paper finds that more than 1 in 5 DB schemes, including household name schemes such as the Ford UK Pension Scheme, offer members the option to transfer out part of their DB rights whilst leaving the rest as a regular income. The research undertaken for the paper shows that financial advisers are very positive about the potential advantages for clients of having the option of a partial transfer. The paper also provides helpful information for sponsoring employers and trustees about the practicalities of going down this route.
Any decision to give up secure DB pension rights must be taken with care and based on expert, impartial advice. But if the option of partial transfers was more widely available, I believe that more people would be able to shape their retirement income and wealth in the way that was right for them, and that this would be a very good thing.
Sir Steve Webb is Director of Policy at Royal London and was UK Pensions Minister from 2010-15.