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Since the introduction of pension freedoms in April 2015 DB pension transfer activity has increased significantly. What is driving this increase in demand? In our opinion, four key factors are in play, they are:
In March 2018 the Financial Conduct Authority (FCA) director of strategy and communication said “Defined benefit pensions are valuable so most people will be best advised to keep them. However, where people are considering a transfer, it is vital that they get good advice to enable them to make an informed decision.”
Until recently many DB pension holders were not aware of the option to transfer. Press coverage of the issues surrounding the BHS and British Steel pension schemes through 2017 and into 2018 changed that.
Coverage of pension transfers has generally increased in the mainstream press. There is significantly more information online and discussion on social media channels has increased. The influence of friends, colleagues and family has also increased (see below).
DB pension benefits are only guaranteed to be paid if the scheme has sufficient assets to cover its liabilities and the sponsoring employer is still around to contribute to any shortfall. If the sponsoring employer fails generally the scheme enters The Pension Protection Fund (PPF)the pension industry lifeboat. This leads to a cut in benefits payable to those still to retire.
Many factors (both political and economic) have driven some Defined Benefit Pension schemes into deficit. This means the scheme does not currently have enough funds to deliver on its long term commitments to pay a retirement income to pension holders.
It is possible those still to retire may consider the transfer option rather than risk a cut in retirement benefits if their scheme does fall into the PPF. However, the way deficits are calculated is complex, economic conditions could change and a scheme deficit on its own is definitely not a reason to transfer.
The same factors influencing high DB pension deficits have driven DB pension transfer valuations to high levels on some schemes. For those aware of the DB pension transfer route, high transfer values can trigger an interest in the pension transfer route.
Transfer valuations can run into hundreds of thousands of pounds and that tends to get people's attention. It is all too easy to compare a final salary pension of say £20,000 per year with a possible pension transfer value of £700,000 and conclude the transfer route is attractive but it is not that simple.
The potential benefits of a DB pension transfer can start to become more attractive with increasing transfer values. Particularly the potential option to pass any remaining pension to beneficiaries on the pension holders death. Of course, the risks also need careful consideration.
Emotional drivers can be a powerful influence, regardless of what the advice may be. If someone in an individual’s personal network has successfully transferred a pension it is more likely they will be inclined to consider taking the same route.
Everyone’s personal and financial situation is different and what is right for one individual is not necessarily right for their friends’ colleagues or neighbours. The financial industry and the mainstream press have a responsibility to provide a balanced view on the potential benefits and risks of transfer. Poor quality information can lead individuals to either do something that is not in their best interests or miss out on a significant opportunity.
If you would like to understand if a DB pension transfer may be worth considering further then simply open a Chat or give us a call. A quick chat through your personal circumstances and objectives will either give you some direction of what you could do next or save you a lot of time and trouble.
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This blog is intended to provide a general review of certain topics and its purpose is to inform but NOT to recommend or support any specific investment or course of action. The past is not a guide to future performance. The value of investments can go down as well as up and you may not get back the full amount you invested. Tax and financial regulations can change. Any figures quoted above are at the date of publication.
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