DB transfer members risk running out of money seven years earlier

A person transferring a £230,000 defined benefit (DB) pension could lose up to seven years of retirement income if they draw a fixed sum of £10,000 a year, according to XPS Pensions Group research. Victoria Ticha writes

A person transferring a £230,000 defined benefit (DB) pension could lose up to seven years of retirement income if they draw a fixed sum of £10,000 a year, according to XPS Pensions Group research. 

In its Member Outcomes Under Freedom and Choice report published on 06 August, the business highlighted how the charging structure of a receiving vehicle during a DB transfer significantly impacts members’ retirement outcomes.

It undertook a detailed analysis of 6000 transfers out of XPS-administered schemes since 2016, with a total value of around £1.4bn, looking at how members were exercising their right under Freedom and Choice to leave their employer’s occupational pension scheme, to reveal the overall impact on retirement savings.

Depending on the choice of retirement vehicle chosen to receive a transfer, it found an individual with an average transfer value of £230,000 could: Run out of money seven years earlier (at age 81 rather than 88) if they draw a fixed sum of £10,000 a year; Receive an income £2,600 lower (£8,100 rather than £10,700) over their expected lifetime; Leave an inheritance £340,000 lower (£500,000 compared to £840,000) at the end of their expected lifetime or buy an annual flat annuity at age 75 that is £4,000 a year lower (£18,500 compared to £22,500).

It also found 95% of transferees were heading into a personal pension product, mostly into self-invested personal pensions. The remaining 5% of transfers were mostly into occupational pension schemes, including master trusts.

The results suggests better support and education is needed so that those choosing to move their pension away from their employer’s scheme are able to make an informed decision.

Given the amounts of pension savings being transferred and the range of outcomes people face, members deserve better guidance, especially while they are still members of their employer occupational pension scheme, according to XPS Pensions Group principal Wayne Segers.

“Advisers, employers, and trustees can do more to help them at this vulnerable time,” he said. “Charging structures can be complex and confusing and employees may end up paying for flexibility in investments that they don’t need and will never use.”

“With a continued surge in transfers from DB schemes expected, it will be important for UK companies to help their employees and ensure they are supported in making good decisions with their pension savings,” he continued. “Recent high profile cases have highlighted the need for employers to take ownership to ensure members don’t make poor choices that may lead to reduced income in retirement and the risk of employers themselves being criticised in retrospect.”

XPS Pensions Group recommended employers and trustees take steps to better understand what is happening to people leaving their own schemes, and to consider offering their members partial transfer values and access to unbiased and regulated financial advice.

This year, pension transfers increased to a record £10.6bn in the first quarter, this compares to transfers of £7.5bn in the first quarter of 2017 and just £3.8bn in the first quarter of 2015, according to data from the Office for National Statistics.

Similarly, the Pensions Regulator said DB pension schemes had reported approximately 72,700 transfers in the period from 1 April 2017 and 31 March 2018.