A survey of more than 800 financial advisers undertaken by mutual insurer Royal London has found a growth of more than 50% in the volume of transfers out of final salary pensions taking place in the last year, with the most common transfer value lying in the £250,000 to £500,000 range. This compares with an average house price in the UK of £216,000 as at March 2017.
The survey found that the vast majority of clients transferring are in their fifties, and the typical cash sum offered is between twenty five and thirty times the value of the annual pension given up. However, 1 in 4 advisers reported that most of the transfers that they deal with are worth thirty to forty times the annual pension foregone.
When asked the main reasons why people who have received advice want to go ahead with the transfer, the following were the top five reasons:
- 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%
- To take benefits earlier than in the DB scheme: 44%
(Note: percentages are of advisers giving a score of 4 or 5 out of 5 for this factor as a ‘main’ reason for transferring)
Advisers also reported on the main reasons which they give for recommending against a transfer. The principal concerns were:
- Concerns about losing the certain income from the DB scheme: 81%
- Investment risk associated with the transfer not appropriate to client: 65%
- Transfer value represents ‘poor value’: 59%
Commenting on the findings, 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."
Advisers also expressed frustration with the length of time it can take to obtain information from schemes in order to provide proper advice on transfers. Around 500 of the 800 advisers who responded said they ‘sometimes or often’ had to get a new transfer value quote because the 3 month window of validity had lapsed before the advice process could be properly completed. Seven out of eight said that they ‘strongly supported’ an initiative by Royal London to press for standardised information to be supplied by schemes alongside transfer value quotes.
Steve Webb added:
"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."
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About Royal London:
Royal London is the largest mutual life, pensions and investment company in the UK, with funds under management of £117 billion, 8.8 million policies in force and 3,745 employees. Figures quoted are as at 30 June 2018.