PensionsAug 29 2017

Pension schemes failing retirees on transfers and guidance

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Pension schemes failing retirees on transfers and guidance

Only around one in six defined benefit (DB) schemes offers the choice of a partial transfer to members, despite widespread support from advisers for the option, research from LCP and Royal London has shown.

More than half of the advisers surveyed said that they ‘strongly supported’ giving savers the option of transferring some of their pension rights whilst leaving some within the scheme.

The majority of DB schemes insist individuals wishing to transfer take all of their benefits - such as a guaranteed income - out of the scheme, with very few allowing individuals to transfer a percentage of their benefits, despite regulations permitting this.

Worryingly this latest research, which is based on two surveys - LCP surveyed over 100 DB schemes and Royal London surveyed over 800 financial advisers – also showed most of the five million people who have rights in a salary-related pension from a former employer are not receiving timely information and advice.

The majority of advisers (94 per cent) surveyed reported a large increase in the numbers wanting to transfer their DB pension rights into a defined contribution (DC) arrangement.

Typical transfer values lie in the range £250,000 to £500,000, and this number is typically a multiple of 25 to 30 times the size of the annual pension, according to the paper.

The research found the three biggest attractions to make a transfer are the greater flexibility available in a DC arrangement; the historically large transfer values currently on offer; and the potential to pass on a lump sum balance on death to heirs.

Among those advised not to transfer, the main reasons are: the loss of a guaranteed income; the ability of the client to handle risk; where the DB pension is the only or main income available.

Sir Steve Webb, director of policy at Royal London, said that millions of workers “may not be aware that they also have rights which could also be moulded to better fit their individual needs”.

Sir Steve said: “For those considering transferring out of a salary-related scheme, the option of a partial transfer would offer a welcome new flexibility and is strongly supported by advisers.”

The research also showed that schemes need to provide comprehensive, standardised information about scheme rights when providing a transfer value quotation.

A majority of advisers said that they ‘often’ or ‘sometimes’ had cases where a lack of information from the scheme meant it was impossible to process transfer advice within three months, meaning that a fresh transfer quote had to be obtained.

Kusal Ariyawansa, a chartered financial planner at Manchester-based Appleton Gerrard, fully empathises with the adviser survey.

He said: “When I am asked to advise a client on their DB arrangements it is to pay off debts, gain access to enhanced wealth or to utilise death benefit privileges. What stops most of this being implemented is the inability to do partial transfers.”

In many cases, Mr Ariyawansa said, the client only needed a partial transfer “to satisfy a debilitating debt scenario, yet was fully aware of the significance of losing a guaranteed (sometimes sole) income in the future”.

A partial transfer would have aided this need, he said.

“As an adviser it is imperative that I am able to provide ongoing support to those who have accessed this sudden wealth so that the usual mistakes (eg. buy high/sell low, pay unnecessary taxes) are not made during the investment journey,” he added.

Pressure has been mounting on the Financial Conduct Authority (FCA) from the pension sector for partial transfers to be made more widely available, as several providers push for more flexibility.

Based on the survey’s conclusions, LCP and Royal London make several recommendations in the paper.

Firstly, schemes need to provide more timely and comprehensive information to members about their options. This could include annual statements and updates from age 55; and schemes would also need to do more to support members in accessing high quality independent financial advice.

Secondly, there should be in place a new legal right to a partial transfer of rights under a salary-related pension scheme (subject to suitable constraints).

Schemes should have a duty to provide comprehensive and standardised information about scheme rights when issuing a transfer value quotation.

The FCA regulations around advising on transfers should be updated, reflecting the world of pension freedoms.

Lastly, there should be a greater focus by regulators on advice post retirement, to ensure that individuals are supported in managing relatively large transferred amounts on an ongoing basis in a cost effective way.

maria.espadinha@ft.com