Pension FreedomJan 4 2018

Rate rise won't impact volume of pension transfers

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Rate rise won't impact volume of pension transfers

Defined benefit (DB) scheme members are likely to continue to transfer their pension to a defined contribution (DC) pot during 2018, as the impact of higher interest rates won't have an immediate impact this year, predicts Willis Towers Watson.

The advisory firm shares a similar opinion to Sir Steve Webb, director of policy at Royal London and former pensions minister, who argued that the volume of DB transfers “shows no sign of abating” during 2018.

According to Peter Rowles, head of Willis Towers Watson’s UK Retirement practice, after the Bank of England's decision to increase the base rate from 0.25 per cent to 0.5 per cent in November, it could be argued that "schemes will start to see a reduction in their liability figures, which could correspondingly lead to lower transfer values being offered to members."

However, "the indications are that interest rates, although rising, will do so slowly," Mr Rowles argued, adding "this is unlikely to have an immediate impact on transfers in 2018".

He said: "We are going to continue seeing significant numbers of employees exiting their DB pensions this year."

Following the introduction of pension freedoms in 2015, DB pension transfers have been soaring, as savers seek to take advantage of sky-high transfer values and to move their nest eggs into DC schemes in order to access their cash.

Figures published by Mercer in April showed as much as £50bn has been pulled from final salary pension schemes in the past two years.

Meanwhile HM Revenue & Customs data showed more than £14bn has been unlocked from DC pensions since pension freedoms came into effect.

According to Mr Rowles, the decision to transfer out shouldn’t be taken lightly.

He said: "As we enter an era of higher inflation, an index-linked DB pension can provide the kind of long-term security that isn’t necessarily available to those with a flexible DC retirement pot.

"People should also seek independent financial advice before making any big decisions on their financial future."

maria.espadinha@ft.com