Defined Benefit  

DB transfer values soar

DB transfer values soar

Defined benefit pension transfer values increased by 15 per cent over 2016, after plummeting gilt yields made it more expensive for schemes to meet their obligations, research by Xafinity has revealed.

The research found a 64-year-old cashing in a DB pension worth £10,000 a year on 31 December 2016 would have received on average £234,000. 

That was £31,000 more than the £203,000 he or she would have received a year earlier.

Xafinity's figures for the year show transfer values spiked in July, after the UK's vote to leave the EU pushed gilt yields to record lows.

The figures show transfer values peaking at almost £245.000 in October, then falling below £230,000, before rising again in December. 

Paul Darlow of Xafinity described 2016 as "a dramatic year for transfer values", that had seen increased interest from scheme members. In particular, he said members had begun to request "partial transfers" from their schemes.

"The impact of financial conditions has been significant, and this appears to have been a material consideration for IFAs and pension scheme members," he said. 

"It feels like there has been an increase in transfer activity since the Brexit vote, and I have seen some extremely large transfers being paid out recently.

"Increasingly 'partial transfers' are being requested by members, and it seems likely that more and more schemes will need to consider whether or not this is something that they wish to offer.”

DB transfer advisers across the board have reported a surge in interest since the introduction of pension freedoms in 2015, as the scrapping of compulsory annuitisation and the favourable inheritance tax rules make defined contribution schemes a more attractive option for many pre-retirees.

This change in circumstances has also led some to call on the Financial Conduct Authority to rethink its approach to DB transfers. Currently, its default position is that transferring out of a final salary scheme is usually a bad idea.

Most prominently, Royal London's director of policy Sir Steve Webb, the recently-knighted former pensions minister, has argued that a new approach to DB transfers could be a "win-win" for members looking to take advantage of "eye-watering" transfer values, and schemes looking to reduce their long-term liabilities.

"The advice framework was created when everyone bought an annuity. But nobody buys an annuity anymore," Sir Steve said.

"We need a proper advice network on this, which we don't have."

james.fernyhough@ft.com