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Savers lose nearly half of pension through transferring out

Savers 10 years away from retirement could lose nearly half of the value of their defined benefit pension if they choose to transfer, according to new research.

The analysis from Royal London and consultancy Lane Clark & Peacock finds for those people the transfer value on offer will on average only be around 55 per cent of the “full value” of the pension given up

It shows for members within one year of retirement, the transfer value is, on average, 75 per cent of the “full value” of the pension given up.

Despite these statistics, the research shows advisers are expecting the impact of the FCA’s new rules on pension transfers to have little impact on people’s decision making.

Advisers have been required to show their clients how the transfer value they have been offered by their company pension scheme compares with a transfer value comparator since 1 October.

This is an estimate of the lump sum needed currently to buy an equivalent pension at retirement to the one being potentially transferred out from.

The survey of 400 advisers tracked the volume of transfer handling compared to 12 months ago. The majority continue to see growth, with one in three having seen an increase of more than 20 per cent.

The paper says: “Anecdotally, there has been a perception that the DB to DC transfer market may have peaked, partly because of negative press coverage around the British Steel case, and the wider coverage suggesting that some people who have transferred have experienced poor outcomes.”

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Even accounting for strong market headwinds, the paper says DB to DC transfers remain “relatively buoyant.”

A total 300 of 400 adviser respondents say there will be no difference to the proportion of cases in which they recommended a transfer following the TVC introduction.

Less than 100 advisers say they expect to recommend fewer transfers.

Royal London director of policy Steve Webb says the TVC introduction could prove useful however, and pension holders should continue to be well-educated on choice.

He says: “With around 200,000 people having transferred out of a company pension in the last couple of years, and thousands more doing so every week, it is vital that they have a clear understanding both of the advantages of transferring and of the valuable benefits they are giving up.  If this new way of assessing transfer values results in better informed conversations with impartial financial advisers before decisions are made, this would be a good thing.”

LCP partner Johnathan Camfield says people transferring out of company pensions will likely be told they are giving up at least half the full value of their pension.

He says: “This does not necessarily mean that transferring is a bad idea, 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.”



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There are 6 comments at the moment, we would love to hear your opinion too.

  1. This is rather rich coming from a company that is trying to convince people to give up Guaranteed Annuity Rates with the offer of a boost to their pension value.

    The offer pack is very badly worded and quotes increases in the value that aren’t guaranteed (hidden away further in the document) and seems designed to ensure that people opt out of Guaranteed Annuity Rates.

  2. Not really news at all, scheme actuaries and insurance actuaries have a polarised view of mortality rates, inflation and future interest rates. Insurance companies build in an element of profit and a safety margin, scheme actuaries are trying to keep the costs down for the employer, so it is unlikely that transfer values would ever be able to purchase the same guaranteed income.

    In simple terms if you transfer out you need equity like returns to justify giving up the guarantees, with the uncertainty that brings, but there are many who are able to accept the risk in exchange for flexibility and control of the capital.

  3. Very simplistic I know but aren’t scheme trustees required to provided members with fair value (or something similar) for transfers out? And if CETVs do not who is at fault?

  4. The issue is that no one knows the future, what will actually happen!

    Yet advisers are being subjected to unfair expectations and forced to police the DB Transfer market.

    Is it not possible that we could also experience high inflation (above the usual 5% max RPI income increases within most DB arrangements), higher gilt yields and subsequently lower transfer values?

    I seem to remember a certain chancellery stating that the boom and bust economy was over, dead, look how well that worked out for him.

    Advisers are not clairvoyant, yet you can bet your house whatever happens it will be blamed on the advisers if the outcome is bad. If they get it right you will not see any thank you or praise.

  5. A 7.2% compound growth rate for 10 years doubles the value of a pension.

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