Financial advisers are calling for more defined benefit pension schemes to offer “partial transfers” of benefits, in a move they claim would let many more retirees take advantage of pension freedoms.
The call comes after pensions consultancy Xafinity observed a small number of pension schemes beginning to offer this service, allowing their members to take part of their guaranteed income as a lump sum.
Xafinity head of proposition development Paul Darlow estimated around 10 per cent of schemes were doing this, but added it was “definitely on the rise”.
He said the bigger, more customer-oriented schemes were the most likely to offer the service.
In many cases, he said partial transfers were not offered as a matter of course, but schemes would often consider them when directly approached by members and their advisers.
There has been a surge of interest in defined benefit transfers since the government scrapped compulsory annuitisation in 2015.
But most financial planners FTAdviser contacted said they had not often come across partial transfers as an option, but all agreed they could benefit many of their clients.
Simon Torry, a financial planner with SRC Wealth Management, said one of his clients was currently trying to negotiate a partial transfer with his scheme trustees.
He said: “I think for many clients [partial transfers] would be extremely beneficial and I therefore hope that trustees will start taking a more flexible approach.”
He predicted that if the scheme in question – belonging to a major car manufacturer – consented, it was “likely … many will follow”.
Ben Smaje, managing director of Kennedy Black Wealth Management, said after contacting the trustees of four different schemes, one scheme belonging to a major insurance company confirmed it would offer partial transfers.
The other three said they would not.
Mr Smaje said partial transfers would be particularly useful to clients for whom a full transfer would push them past the £1m lifetime allowance.
“If you were really clever about it and transferred out a portion and left the rest, then you would mitigate the drag of the lifetime allowance,” he told FTAdviser.
He said at the moment he was advising about 50 per cent of those clients who requested a transfer evaluation against cashing in their defined benefit pension.
But if partial transfers were readily available, he said he would probably advise more clients to go ahead.
Graeme McColgan, financial planner of Million Plus Financial Planning, said he had “not seen enough of this” but it could be a “fantastic option”, allowing members to cover their minimum income requirements, then transfer the rest to be used “as and when they wish”.
But while the partial transfers could be in the interest of both members looking for more flexibility, and sponsoring companies looking to reduce their liabilities, Mr Darlow pointed out that partial transfers posed unique administrative difficulties.
The major difficulty, he said, stemmed from historical changes to legislation.
“Members don’t just have one pension, they have lots of little bits of pension which increase at different rates. That means it’s very difficult to transfer less than 100 per cent,” he said.
He explained, for example, that benefits accrued before 1997 did not have to increase at all; those accrued between 1997 and 2009 had to rise by inflation, up to 5 per cent; and those accrued after 2009 had to increase by inflation up to 2.5 per cent.
He said state pension benefits contracted out to workplace schemes through the guaranteed minimum pension (GMP) regime were another “bit” of pension again.
To overcome this, he said schemes could offer transfers of these different, historically distinct “bits”.
This, he said, would be easier to administer than offering partial transfers as flat percentages of the total benefits.
james.fernyhough@ft.com
