Following the introduction of pension freedoms by George Osborne in the 2014 Budget the upsurge in requests from deferred scheme members to transfer their final salary pension rights to a personal pension has been marked. The demand has been further fuelled by concerns raised about the security of DB schemes by the well publicised problems of the Tata (British Steel) and BHS schemes.
The right to a pension transfer has existed for many years although this often does not apply in the final year immediately before the scheme's pension age. What has changed is that the pension freedom and choice legislation means people feel a deeper sense of having the opportunity to take ownership of their retirement rights.
Previously, most scheme members thought that if they transferred out to a personal pension they would still have to buy an annuity at retirement, giving over the ownership of 75 per cent of their fund to another faceless institution. Of course, that has not been the case for many years, since pension drawdown was introduced more than 20 years ago.
But do these changes mean it is better to transfer from a defined benefit scheme now than it was before? In short, the answer is ‘no’. But the pension changes are not the only factor in play. We now have historically low interest rates, which means transfer values have risen. Also, personal debt levels are far higher than they were when the transfer regulations were first introduced and access to pension cash for debt repayment was not a key issue.
So, we have a coalescence of factors that make pension transfers more appealing to deferred scheme members. For advisers this upsurge in demand can create a heady cocktail, but therein lies risks.
First, treating customers fairly was never about giving clients what they want. It is easy to fall into the trap of believing that just because your client wants control of their pension rights – for what may well be perfectly understandable reasons – that should be a key reason in favour of recommending a transfer. That is not to say the client’s motives should be ignored. They should form part of a wider and comprehensive assessment and given an appropriate weighting in the overall advice process depending on the needs and circumstances on a case-by-case basis.
Another external factor that has changed over the years is that, with the progressive reduction in interest rates, annuity rates have fallen. This begs the question as to whether, for the purposes of transfer advice, the standard ‘critical yield’ analysis is still as important as it was previously.
In its consultation document CP15/30, the FCA said: “Although in the past most people in DC schemes purchased an annuity, with the new pension freedoms this is less likely to be the case in the future. Those seeking to transfer out of a DB scheme are perhaps those most likely to want to take advantage of not taking their income in a predetermined pattern.