Most advisers would run a mile rather than recommend a transfer from a defined benefit scheme but transferring to a personal pension often meets the customer’s needs. DB schemes offer more security but a transfer can offer greater flexibility. Balancing these competing needs is difficult, particularly when the decision is all or nothing. Could split transfers be the answer?
Both The Pensions Regulator and the FSA have previously voiced concerns over DB to defined-contribution transfers. The analysis and advice associated with this work is complex and customers need to fully understand the risks as well as the benefits. Only those who possess the requisite qualifications are allowed to give advice and, even for those who are skilled in this area, the costs of professional indemnity insurance are high.
Despite such concerns, there are many reasons to transfer. Death benefits under a personal pension can be substantially better than those offered by DB schemes. Those who are in poor health, single people and those taking tax-free lump sums can also make gains by transferring out.
Many customers see the benefits in transferring but taking all the risk themselves is offputting. However, changes in the external and legislative environment may just be the stimulus needed.
The shaky state of the economy and the challenge for some businesses of staying afloat means that current and former executives that are members of DB schemes sponsored by these businesses face substantial pension losses if the employer goes bust and they are left to rely on benefits provided by the Pensions Protection Fund.
Changes to pension tax rules – specifically the annual and lifetime allowances – will leave many senior people facing the decision of whether to opt out or stay in and face high tax charges. Opting out does not necessarily lead to transfer but elimination or reduction of the 55 per cent lifetime allowance charge may give cause to consider this route.
The new age 75 rules are extremely attractive but full flexibility is only available to those meeting a £20,000 minimum income test.
If schemes were prepared to offer split transfers, with £20,000 or the level of PPF protection left in the scheme and only the excess transferred, more members might transfer.
This is a win for the customer in that they get some certainty and flexibility and a win for the trustees as, although they would prefer to lose the whole liability, they are at least losing some. It is also a win for advisers who can more confidently recommend transfers having hedged their clients’ risks, yet also met their needs. PI insurers may also see the benefit of this approach.
John Lawson is head of pensions policy at Standard Life