14th February 2015 | Business Correspondent/Personal Finance Editor
Read the full article on the Herald website
Up to 1.67million workers with final salary pensions are open to trading them in for pension pots which could be converted into cash, a survey suggests.
One third of respondents with the supposedly gold standard pensions either intend to transfer out or are undecided, following the radical rule change which will allow over-55s to access their pension flexibly from April.
On Hargreaves Lansdown’s survey of 1037 members of final salary schemes, pensions expert Tom McPhail says it implies that over 500,000 people already have a clear intention to transfer, with 1.17m considering it, which must be “worrying news both for the pensions industry and for policymakers”.
He goes on: “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.”
Of the two-thirds not intending to move their pension, 80 per cent cited the value of guaranteed benefits.
Around 4 per cent said they would transfer out before retirement. “This is puzzling,” Mr McPhail says. “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. A transfer to a defined contribution pension surrenders these benefits and leaves members subject to the fluctuations of the stock market.”
The key is transfer values. Hargreaves says they typically do not adequately compensate members for what they give up, requiring investment returns of 8per cent to 10per cent to provide the equivalent benefits. However, Glasgow-based company pensions specialist Hymans Robertson has predicted a similar level of interest from employees in transferring out, while rival Towers Watson says transfers will “now become a mainstream choice which pension schemes need to cater for” – reporting that some schemes are considering including transfer values on individuals’ annual pension statements.
According to Towers’ research, nearly 10per cent of employees approaching retirement are interested in trading most or all of their final salary pension, 11per cent would be interested in exchanging half of it, and 24per cent less than half of it.
The government has already stipulated that any transfer must be backed by a regulated adviser.
Experts say anyone requesting and receiving a transfer value from their scheme should seek out a specialist an adviser, who should subject it to an independent transfer value analysis system (TVAS) report. All the final salary scheme’s benefits such as a spouse’s pension (even if not wanted) must be considered and properly valued.
The tricky area is that every scheme can take its own view on what it can afford, with one consultancy Tideway reporting transfer values varying from 10 times the member’s starting pension to over 40 times. It says typical transfer value offers range between 25 and 33 times, so in theory someone about to retire on a £10,000 pension might be offered £250,000 – which he then has to invest wisely.
Hargreaves says it has seen an 82per cent increase in transfer inquiries since the Chancellor announced the changes last year, but only 12per cent of the transfer values passed its ‘value for money’ test. It claims: “Most defined benefit members will be best served keeping their benefits intact, but the few instances where a transfer can make sense often occur at the point of retirement.”
John Lawson, head of pensions policy at Aviva, has warned that many schemes are making “terrible” offers in order to discourage members from leaving.
Standard Life has said transfers are “one of the most cost-effective ways” for employers to de-risk their pension schemes, but noted that where schemes have a funding shortfall, transfer values can be reduced accordingly.