When your pension transfer is worth more than your home
Transfers from defined benefit pensions are a hot topic in the world of financial planning right now.
With falling interest rates and gilt yields, the cash equivalent transfer value (CETV) offered by defined benefit pension schemes has skyrocketed.
New research has identified the most common pension transfer value in the range of £250,000 to £500,000.
Pension provider Royal London surveyed more than 800 financial advisers and discovered growth of more than 50% in the volume of transfers out of final salary pensions during the past year.
With a typical transfer value of more than £250,000, these pension transfers are often worth more than the average value of a UK home, which stood at £216,000 in March.
According to the survey, the majority of those choosing to transfer out of defined benefit pension schemes are in their fifties, with a typical cash sum between 25 and 30 times the annual guaranteed pension being given up.
In some cases, the cash transfers are worth 30 to 40 times the annual pension, with one in four financial advisers reporting pension transfers in this range.
According to the survey, the most common reason for giving up a defined benefit pension in return for a cash transfer value was the ability to provide a more flexible pension in retirement, with 83% of financial advisers giving this reason.
78% pointed to the large transfer values on offer, which in our opinion is an odd motivation, as the transfer values are only bigger because it costs more than secure the level of pension income being offered.
Advisers reported motivations including inheritance considerations, access to greater tax-free cash, and taking benefits earlier than those available from the defined benefit pension scheme.
Royal London also asked advisers for the main reasons they recommended against a transfer, which included concerns about losing the guaranteed income from the pension scheme, the investment risk associated with the transfer value, and the transfer value representing ‘poor value’.
Commenting on the findings, Royal London director of policy Steve Webb said:
‘It is clear that large and growing numbers of people are choosing to exchange the promise of a regular pension in retirement for a large cash lump sum.
‘For some people, the value of their pension pot will be greater than the value of their house. This makes it all the more important that people think very carefully before making a transfer, and take full account of independent financial advice before making such an irrevocable decision’.
Making the decision to transfer your defined benefit pension is something that should never be taken lightly.
It’s a regulatory requirement for savers with cash equivalent transfer values exceeding £30,000 to obtain regulated professional advice before being able to transfer their final salary pension to a pension pot.
This can sometimes feel like a frustrating barrier to accessing your own money, but it’s an important safeguard to ensure all of the factors are carefully considered before making an irrevocable decision to give up valuable pension benefits.
If you are considering a transfer away from your defined benefit pension scheme, make sure you seek independent and impartial financial advice from a specialist with relevant experience with this type of advice.
Be prepared to pay a fee for the advice; it’s dangerous to work with an adviser who works on a contingent charging basis, receiving a higher fee if they recommend a transfer, which is often expressed as a percentage of the transfer value and can run into tens of thousands of pounds.
In order to receive truly impartial advice on this issue, pay a project fee for advice with no additional fees charged if you decide to transfer.
This approach could result in the adviser recommending that you stay put in your defined benefit pension scheme, if this is the most suitable course of action.
If that is the case, the fee you pay for advice is money well spent and could save you from making a very expensive mistake with an extremely value pension benefit.