Are too many people transferring from their DB pensions?
The demand for defined benefit (DB, sometimes known as final salary) transfers is still at a very high level with HM Revenue & Customs confirming that £30 billion has been transferred since April 2015 (when Pension Freedoms started). At the same time the FCA have said this year that 69% of adviser clients had been recommended to transfer out of their scheme, whilst still holding that “most” individuals should not transfer.
It is early days, but the Financial Ombudsman have only received just under 800 complaints in 2018/19 about transfers and most of these complaints are not about the suitability of the transfer itself but the investment choice that has been recommended.
I continue to be of the mind that many individuals will live to regret their transfer out of their DB pension, albeit many may not be financially worse off today as markets continue to be buoyant, investment returns still approach double digits, and the cost of reinstatement into a guaranteed income may be very high.
Many advisers have stopped their permissions as professional indemnity insurers are concerned that there will be DB transfer complaints, and my concern is not that individuals feel disadvantaged today but if there is any of a market correction, pension review by the FCA, or take up by claims management companies looking to earn for their clients.
For most people a defined benefit pension is a worry-free index linked guaranteed income for life but also takes care of an individual’s dependence and many people have exchanged these guaranteed rights for an unsecure “flexible” income which also may be passed to a broader range of non-dependants (“death benefits”).
The ongoing management costs and headaches of managing a personal pot may well not be a price worth paying for many people who desire “flex ‘n’ death” as I have so often seen and read commented in trade press, but given the irrevocable nature I have also had individuals who have searched for a competitively charged financial planner who can help them understand what they are in, how it might work for them with a robust long term cash flow model. The people who have transferred out of their final salary schemes who either regret it or at least do not understand the potential downsides we offer a range of services, and whilst we may not be able to reinstate the previous benefits we feel an informed approach to managing a transferred defined benefit pot is preferable to a “wait and hope” approach.