More than half a million defined benefit (DB) scheme members are set to give up their guaranteed benefits. Almost a third of members have yet to rule out transferring. Reasons why members wish to transfer – control at retirement is key. Reasons why scheme members don’t want to transfer. More than half of those intending to transfer will do so prior to retirement rather than at the point of retirement. These results are based on a Hargreaves Lansdown survey with 1,037 responses.
Nathan Long – Head of Corporate Pension Research at Hargreaves Lansdown;
“The majority of scheme members recognise the value of their defined benefit pensions and have already rejected the idea of a transfer These schemes still deserve their ‘gold plated’ tag, the pension freedoms do not change that. However many are potentially interested in a transfer and a minority of them (7.8 percent of all those who responded to the survey) have expressed a firm intention to transfer to a money purchase pension. Most retirees will be well served with a mix and match approach. A bedrock of guaranteed income to cover essential spending in retirement, coupled with some additional flexibility for the non-essentials. Defined benefit schemes can be used to help cover the essential spending. Transfers can make sense in certain circumstances and often at the point of retirement. These circumstances should be considered the exception rather than the rule. ’
How many will transfer?
Two thirds of respondents have no intention of transferring their defined benefit pension schemes. This is comforting – the majority realise quite how valuable the guarantees offered by these schemes are. However, this leaves one third of respondents either intending to transfer or as yet undecided. Given active members are unlikely to transfer until they cease accruing benefits, come 6th April we could potentially have 1.67 million individuals (one third of 5.06 million deferred members) evaluating their options. 7.8 percent of respondents stated they would transfer. Based on 6.87 million1 deferred and active DB scheme members this equates to 535,860 members.
Reasons for transferring
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. The full breakdown of responses is below;
I would prefer a lump sum to an annual income – 17.74 percent
NB: Respondents could select all options which were relevant to them, therefore the results tally to more than 100 percent
Reasons for not transferring
The majority (67 percent) will not transfer. The reason – they recognise their defined benefits are very valuable(80 percent cited this as a reason). Anecdotal evidence also pointed to the fact that;
– Many individuals are unaware of the option to transfer and take advantage of the pension freedoms. So, increased publicity as we near April is likely to spark even greater interest.
– Many have both DC and DB pensions. They plan to use their DC element to provide flexibility, with the DB used as the bedrock of their retirement income. A sensible strategy.
Of those sure of transferring, more than half wish to do so before retirement.
This is puzzling. 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. Typically, transfer values do not adequately compensate members for the benefits being given up. It is common that investment returns of between 8 percent and 10 percent are required every year to provide equivalent benefits, should a transfer take place. This makes transferring prior to retirement unrealistic for even the most bullish investor. At retirement, the benefit of this increase has already been received and a retiree has a better understanding of their needs moving forward. 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.
1The number of deferred and active Defined Benefit scheme members is taken from the PPF’s Purple Book 2014.
