DB members predominantly choose Sipps

DB members predominantly choose Sipps

Savers transferring out of defined benefit pension schemes predominantly flock to self-invested personal pensions, a pensions consultancy has said, as it found 99 per cent of its member transfers ended up in a Sipp.

XPS Pensions Group has seen about 7,800 members transfer out of DB schemes in the past two years, with 99 per cent opting for a Sipp as their destination.

XPS stated it was concerned by the large number of clients deciding to do this. Due to the low average size of pension funds transferred (less than £10,000 a year) members may not need, or benefit from, the potential upside that higher cost Sipps can provide.

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Wayne Segers, principal at XPS, said the main reason for the large uptake of Sipps was that there were not many alternative vehicles that IFAs can offer their clients.

But he said: "With The Pensions Regulator currently reviewing applications and providing authorisation for the continued operating of master trusts, this trend may change.

"Members transferring into a Sipp is not necessarily a good or bad outcome, this purely depends on whether the members end up being charged for features they do not need or use."

Tom Selby, senior analyst at AJ Bell, said: "Investors have a wide choice of Sipp providers to choose from, each offering different levels of service and crucially charging different fees.

"It is absolutely critical anyone picking a Sipp – whether it’s someone transferring a DB scheme or a new investor – shops around the market to make sure they get the best value for money possible."

From October 1, 2018, master trusts had until March 31, 2019 to apply for TPR authorisation to demonstrate that they have met the new required standards.

Under the new rules the number of master trusts operating in the market more than halved from the 90 master trusts that were active back in November. 

Only two master trusts were granted authorisation last month, taking the total authorised thus far to five.

According to XPS’s research, the 1,800 member transfers made between June 2018 and March 2019 were worth £500m and the average transfer value increased from £230,000 in the previous year's survey to £275,000.

The survey revealed that individuals who chose more expensive vehicles, such as Sipps, over lower cost alternatives could run out of money seven years earlier if 25 per cent tax free cash is taken and they draw an annual income of £12,000.

They may also receive £3,200 less each year over their expected lifetime and leave £400,000 less inheritance at the end of their expected lifetime.

Mr Selby said: "Transferring out of a DB scheme could be one of the most significant financial decisions a person can make, so getting good advice to understand the pros, cons and long-term implications of such a decision is absolutely essential.

"Given that for most people the decision to transfer will have been driven by the flexibility and attractive death benefits available in defined contribution plans, it is unsurprising Sipps have become the vehicle of choice.