Defined benefit to defined contribution transfers are dominating the headlines at the moment. It is the hottest ticket in town but we should not lose sight of how this has come about.
The pension freedoms introduced in 2015 transformed the way people could access their DC pension pots. People with DB pots saw this and wanted a piece of the action. Then came the steady rise in transfer values.
Take Bob, who is a gas fitter. He has been doing the job most of his life and, while he is not earning a huge salary, he has done pretty well. He has been a member of his company’s DB scheme and is coming up to retirement. He requests a transfer value and it comes back at around £1m. Word spreads around Bob’s colleagues and more transfer values are requested. The snowball effect ensues.
Such transfer values have understandably caused much excitement among the public. But recent weeks have seen a greater focus put on the potential consequences of these transfers.
The FCA is currently consulting on how it regulates DB transfers but it remains unclear who will be held accountable in years to come should someone who took a transfer later decide it was not the right move.
Some advice firms have now pulled out of the DB to DC market, or at least put a pause on new business.
Research we recently conducted puts into perspective why this is such a tricky area. We found four in 10 people say they are still negatively impacted by financial mistakes they made in the past. That is a pretty significant number of people carrying around some weighty financial baggage.
Almost two thirds of people also said they wish they had managed their finances differently. I find this particularly interesting as it means there are a third of people who appear to have no financial regrets at all.
The research also found almost a quarter of people aged over 65 are still being adversely impacted by financial mistakes made earlier in life.
So the figures clearly show that financial decisions can have consequences that last for years. In the case of cashing in a DB pension, those consequences could be with you for the rest of your life.
No one should be cashing in a DB pension pot without taking advice. In fact, as you know, if it is worth more than £30,000 someone has to take advice. Giving up guaranteed income for life is a big decision that cannot be taken lightly. For some people, it is absolutely the right thing to do, but as an industry we need some clarity on who can be held accountable and in what circumstances.
As for Bob, I am sure £1m sounds very tempting, but only if it lasts as long as he does.
John Lawson is head of financial research at Aviva
We are debating what next for DB transfers at Money Marketing Interactive, which is being held at the Majestic Hotel in Harrogate on 14 September. To join over 100 advisers and register to secure your free place, click here.