Defined Benefit  

Spotlight: DB transfers

Spotlight: DB transfers

Advisers should have a process in place to deal with transfer requests rather than dismissing them out of hand, says David Trenner

Those with defined contribution pensions now have increased choice as to how they access their funds and get the best from them in retirement. Consequently, a growing number of people with defined benefit (or final salary) pensions – to whom the new rules do not apply – are considering whether to give up their secure pension income in favour of more flexibility. 

This growth has been further fuelled by record high transfer values, due to the latest round of quantitative easing and base rate cuts, and by the shock of front-page negative pension stories such as those concerning BHS and Tata Steel. 

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There can be compelling reasons to consider a pension transfer. Some will simply want to take advantage of flexibility while others will transfer to improve death benefits or to buy an enhanced annuity paying higher income. Conversely, there can also be many compelling reasons not to transfer.

Increased demand is predicted to result in transfers of £10bn per annum and there is likely to be considerable interest from those approaching retirement and those with deferred pensions. However, the increase is putting pressure on schemes and administrators, which can result in delays and scheme administrators becoming less flexible.

Differing approaches

Anyone in a funded DB scheme has the right to request a cash equivalent transfer value (CETV) once every 12 months, unless they are within a year of the scheme’s normal retirement date, although many schemes will also permit transfers within this year.

My company, Intelligent Pensions, advises many clients on transferring and recently came across a scheme that decided to enforce the ‘one CETV every 12 months’ rule. The scheme was managed by one of the UK’s largest administration providers, but it is considered likely that other schemes will follow suit.

Guarantee period

If schemes are to take a less flexible approach they will need to ensure their members are aware of the implications. Members start a three-month guarantee period when they receive their CETV, but often do not seek the required specialist advice until just weeks or days before the guarantee expires.

If a scheme is unwilling to provide a recalculation after the guarantee period, it is likely some members will simply miss the window and be forced to wait another year before being able to effect a transfer. 

At the time of sending out the CETV and scheme information, administrators need to realise that decent advisers will want more than basic information if they are to provide full advice to scheme members.

Enforcing the ‘one quote a year’ rule may be about saving costs, as most big schemes outsource their administration and are charged for each piece of work carried out. Another reason for enforcing the rule may be an active trustee choice to protect the interests of remaining members.