9th February 2015
It is estimated that more than half a million savers are gearing up to transfer out of their gold-plated final salary pension schemes when the new retirement freedoms come into force in April, new research has claimed.
The analysis from financial advisory group Hargreaves Lansdown found the minority who have already made up their mind to transfer intend to do primarily for flexibility and control at the point of retirement. This is closely followed by the ability to pay any leftover pension to the children in the event of death. The full breakdown of responses is below:
Reason for transferring
|I would prefer a lump sum to an annual income||17.74%|
|I would like to pass what is left of my pension pot down to my children when I die||43.55%|
|I want more flexible income||53.23%|
|I want to retire early||29.03%|
|I am in ill health||1.61%|
|The pension provides spouse’s benefits which I do not require||16.13%|
NB: Respondents could select all options which were relevant to them, therefore the results tally to more than 100%
Final salary, or defined benefit pensions plans are a dying breed, as they give a guaranteed annual income based on the number of years an employee lives and therefore the longer an employee lives, the more the scheme has to pay out.
Transferring to a defined contribution pension surrenders these benefits and leaves members subject to the fluctuations of the stock market and in addition, typically, transfer values do not adequately compensate members for the benefits being given up.
It is common that investment returns of between 8% and 10% are required every year to provide equivalent benefits, should a transfer take place. This makes transferring prior to retirement unrealistic for even the most bullish investor.
Unsurprisingly then, the study found that two-thirds of respondents, obviously valuing the guarantees offered by these schemes have no intention of transferring their defined benefit pension.
But this still leaves one third of respondents either intending to transfer or as yet undecided. Given active members are unlikely to transfer until they cease accruing benefits, come 6 April, Hargreaves Lansdown said this could potentially mean some 1.67m individuals are evaluating their options.
Tom McPhail, head of pensions research at Hargreaves Lansdown said: “The majority of defined benefit scheme members recognise the value of their guarantees and want to hold on to them. However there is clearly a significant minority who are at least interested to explore the possibility of transferring to a defined contribution pension, with up to half a million who currently have a clear intention to go ahead.
“This should be worrying news both for the pensions industry and for policy makers. Even if most transfers don’t go ahead this could result in a lot of additional and expensive work producing transfer calculations and advising on them.”
Hargreaves Landown’s study also found that of those sure of transferring, more than half wish to do so before retirement. “This is puzzling. For deferred members, a defined benefit pension provides two things other pensions do not, a guaranteed income and the guarantee that the pension is growing all the time,” added McPhail.