Defined BenefitAug 12 2020

Warning record values make DB transfers ‘tempting’ option

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Warning record values make DB transfers ‘tempting’ option

Defined benefit transfer values reached record highs in July, with the number of savers making a transfer returning to pre-lockdown levels, according to data from XPS Pensions.

In an update issued today (August 12), the consultancy said its transfer value index reached an all-time high of £261,500 on July 30, compared with £259,700 at the end of June.

The increase was largely driven by a fall in gilt yields during August, XPS stated.

The firm saw the number of transfers fall slightly compared with June, however the number of completed transfers remained at levels seen prior to the Covid-19 pandemic. 

Transfer activity in July was at an annual equivalent of 0.94 per cent of eligible members, down from 1.05 per cent in June. This represents 94 in every 10,000 eligible members transferring each year.

Mark Barlow, partner at XPS Pensions, warned the rising values could tempt more people to turn to DB transfers, which came with risks.

He said: “The continuing rise in transfer values is making them an increasingly tempting option for members. However, there are risks associated with transferring, and employers and trustees have a vital role in ensuring members have sufficient support available when considering such important decisions.”

Meanwhile advisers are continuing to leave the DB transfer advice market, while others have been restricting the services they offer.

A report from Aegon published in May revealed the proportion of advisers offering advice on DB transfers shrank from more than half of the population in 2018 to four in 10 last year.

Out of the 227 advisers surveyed, it found that of the 41 per cent who did offer DB advice, 3 per cent expected to stop providing it in the next 12 months, 15 per cent expected the volume of cases to “significantly reduce” while 23 per cent thought their DB work would remain the same.

According to XPS, this is mainly due to the Financial Conduct Authority’s crackdown in this area and its ban on contingent charging, which comes into force from October.

Mr Barlow raised concerns about the reduction of capacity within the advice market at a time when there is an ever-greater focus on providing members with appropriate support.

He said: “As we expected, a number of financial advisers are leaving the DB transfer advice market following the ban on contingent charging. This will make it harder for members to get crucial advice, leaving them vulnerable to poor decisions or, at worst, pension scams. 

“A recent XPS poll of more than 150 scheme representatives found that over 85 per cent of employers and trustees agreed that pension schemes should help members to obtain financial advice. 

“In the last year we have worked with schemes to make high quality financial advice available to 18,000 more pension scheme members.”

Financial advice is compulsory for transfers worth £30,000 or more.

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