Defined Benefit  

Savers lose half their pension value when transferring

Savers lose half their pension value when transferring

Savers a decade away from retirement are only offered 57 per cent of their pension value when they transfer out, according to research.

According to a survey of 200 defined benefit (DB) schemes from consultancy firm LCP, this was the median value offered by pension funds to their members when they requested a transfer.

The value was reached using new calculations imposed by the Financial Conduct Authority (FCA) which came into effect last week.

This research is part of a 28-page policy paper called What will the FCA’s new rules mean for DB to DC pension transfers? by LCP and mutual insurer Royal London.

Under the FCA's new rules financial advisers must provide their clients with a value of how much the benefits in their DB scheme would cost today in the open market, called the transfer value comparator (TVC).

The TVC shows, in graphical form, the transfer value offered by the DB scheme and the estimated value needed to replace the client's DB income in a defined contribution (DC) environment, assuming the investment returns were consistent with the client's attitude to risk.

The survey found the range of transfer values offered by different schemes was very large – some schemes offered 40 per cent of the full value while others offered double this.

This reflected the wide range of investment strategies adopted by schemes and the wide range of assumptions adopted by trustees for calculating transfer values, LCP said.

Previous research from LCP showed that the introduction of the TVC in pension advice is expected to stop some savers from cashing in their savings.

Jonathan Camfield, partner at LCP, said the fact a saver was being told they’re giving up around half of the full value of their pension didn't necessarily mean that transferring was a bad idea.

He said: "But it does show very clearly that those who transfer out are forgoing a great deal of certainty about their future retirement income and that this certainty is of considerable value."

Nevertheless, the majority of financial advisers weren't expecting the new rules to affect the outcome of their recommendations, or to impact the overall demand from savers to cash in their benefits.

A survey of 400 financial advisers conducted by Royal London found more than one in three of the respondents were seeing an increase of more than 20 per cent in the volume for requests for pension transfer advice.

In 2017, £36.8bn was withdrawn from pension schemes, according to data from HM Revenue & Customs.

The large majority of advisers (75 per cent) felt the new framework would not make any difference to their overall recommendations as to whether or not to transfer.

The fact advisers will now have to present the transfer value analysis in a different way ought not to affect whether or not they judge a transfer as being in the client’s interests or not, Royal London said.