Fifteen-fold surge in big DB to DC transfers post pension freedoms

DB to DC transfer activity has increased fifteen-fold where big pots are involved since pension freedoms took effect in 2015, while a third of retirees will take transfers if given advice and clear communications.

An analysis by Aon of activity across schemes it oversees shows the number of people with pots worth more than £500,000 has increased by a factor of 15 since the introduction of pension freedoms two years ago. Aon says it is detecting a trend of an increase in transfers amongst older members.

Earlier this week The Pension Regulator said it estimates around 80,000 DB to DC transfers took place in the year to March 2017. It does not hold figures for previous years.

Aon partner and head of member options Ben Roe says: “We’ve seen a continual increase in the volume of members looking to transfer. For those with transfer values of £500,000 or more we have seen a fifteen-fold increase since before pension freedoms were introduced, which is staggering.

“Those with bigger transfers are more likely to have inheritance planning issues and are typically more financially literate than those with smaller pots.”

Scottish Widows spokesperson Lorna Gilmour also momentum building. She says: “We have seen a 170 per cent increase in transfer requests year on year since last year. March saw us getting 500 requests through our transfer valuation process, which was higher than all previous months.”

Ultra-high transfer values are clearly driving interest, but so too are better communication strategies says Roe: “There is a growing group of pension schemes that are being more proactive in their communications, making sure the transfer value is clearly visible in documentation when people come to retire. Others are even paying for advice.

“Where schemes offer free advice and clearly communicate transfers at retirement we typically find between 30 and 40 per cent of people tend to transfer.”

Advisers are cautious about the regulatory ramifications of advising on transfers, with bitter memories of pension misselling still lingering in the memory of older practitioners. But a need to deliver what is best for clients remains.

Cavendish Ware Wealth Management & Financial Planning associate director Roy McLoughlin says: “There is a paranoia amongst IFAs about being challenged in the future over the advice to switch. And it does feel like there has been a misunderstanding about pension freedoms in that people are almost ignoring the fact that they will have to pay tax on the money if they want to get their hands on it. But there are the other issues, such as death benefits, which can’t be ignored. Death benefits can’t be the reason you move, but many of my clients are in the media and for those in same-sex relationships, the fact that benefits of civil partners cannot go back before the Act took effect in 2005 is troubling.”

Chase de Vere corporate advice manager Sean McSweeney says: “We are seeing lots and lots of requests, but our starting point is always that it’s probably not a good idea. I see significant risks in the volumes that are being transacted at the moment. We hear about small firms out there who aren’t being so careful, and who are taking insistent clients through the process, telling them their advice is that they shouldn’t transfer, but then doing it anyway. That is concerning.”

Critical yield remains at the heart of the advice process on transfers, despite other factors such as marital status, health and life expectancy and attitude to risk. Advisers have historically talked of critical yields between 4 and 6 per cent being open to debate, with anything over 6 too risky and anything under 4 likely to be within the realms of safety.

McLoughlin says: “We are seeing lots of enhanced transfer values coming through. Basically the actuaries massage the figures so that a critical yield that they know will work in at least some scenarios comes out the other end when the adviser does the analysis.”

Roe argues that today’s ultra-high transfer values, which some advisers report as being up to 50 times the annual income being surrendered, should in theory not have any impact on advisers’ critical yield calculations.

“The key point is that you have still got to work out what to do with the money to create income. The fact that gilt yields are so low while transfers are so high mean theoretically both should cancel each other out in terms of the transfer analysis,” he says. “But increasingly the decision is more and more about what is the right solution for the individual.”