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Will the Last Member Transferring Out of Funded Final Salary Pension Schemes Be Turning Out the Lights?

The cash equivalent transfer values currently landing on clients’ doormats are big, which means orchestrating those transfers has already become big business for advisers. But just how many members are likely to be tempted by a juicy pension transfer offer?

Basic psychology suggests the number could be very high indeed. Cash in hand now, even if it is immediately squirreled away again in a money purchase pension, means more to people than the harder-to-define promise of cash at some point in the future. 

Other draws for clients include that there tends to be less hassle when it comes to taking cash lump sums from defined contribution pensions, and the fact that it can be easier for loved ones to inherit such pensions when the pensioner passes away.

So as advisers we need to be prepared for pension transfer enquiries to continue rising. The trend may not even have fully begun.

 
Is all fair in love and pension transfers?
 
Although still high, transfer values have fallen slightly from their post-Brexit frenzy. Then, they were driven up partly by gilt yields collapsing as nervous investors rushed into UK government debt to shield themselves from the economic turbulence that followed the referendum.
 
That may well have proved disappointing for members who had received a transfer value just after the referendum and have now had a new, lower one more recently. Those members may now be keener than ever to transfer out before pension transfer values slide any further.
 
But how do members of defined benefit pension schemes know if they’re getting a good deal? It’s easy for them to think they’re getting a fair transfer value if they see a lot of zeroes, but is it possible to find out if what they’re being offered stacks up against the pension transfers market as a whole?
 
That’s a tricky question, which is why we’ve built the Drewberry Final Salary Pension Transfer Calculator. It lets clients benchmark a transfer value they’ve received on a scale to give them a rough idea of where their offer stands in terms of its generosity. Even without an existing cash equivalent transfer value (CETV), a client can use our calculator to get a sense of what the figure could be just by entering a few simple details.
 
Putting the CETV cart before the adviser horse
 
At Drewberry, our experience is that it’s better for customers to come to an adviser before requesting a CETV from their pension provider. We’d encourage other advisers to promote a similar process.
 
If customers want a rough idea of what their final salary pension could be worth if they transferred, then using a tool such as our calculator can help. However, it’s usually better if requesting a CETV is left to advisers.
 
That’s because a CETV is only valid for three months, which immediately gives a client a limited window of time, during which a lot has to happen to set wheels in motion towards finalising a transfer. After requesting a transfer value, clients have to consider whether they’d like to go ahead, find and research an adviser, discuss their options with their chosen adviser and wait for the adviser to do the necessary work. A customer then has to take time to consider the advice they’ve received.
 
Given that many people wait until there’s a sense of urgency about a task before they do it – particularly one such as discussing pension arrangements – we’re starting to see clients come to us in the bottom of the ninth, with their three month window about to close.
 
Even though most advisers can turn around recommendations in surprisingly short periods, doing so could then leave the customer feeling rushed into making a decision – one that could have vast impact on the decades of their lives.
 
One at a time
 
Moreover, with pension funds only obliged to give one free transfer value per year, the one a client has requested could be old before it even crosses an adviser’s desk. 
 
A transfer value requested pre-Brexit, in May 2016, would likely be vastly different from one requested post-Brexit, in July 2016. Yet if a customer approached an adviser in July with a transfer value from May, there’s no guarantee that the adviser would have been able to get hold of a new figure that better reflected the state of the market.
 
That’s why Drewberry recommends clients use a final salary pension transfer calculator tool to give themselves a rough estimate of what their CETV could be instead of requesting an official CETV themselves. 
 
That way, a customer gains some idea of what their transfer value might be but the clock doesn’t start ticking until they find an adviser they’re happy with, who will then request that precious once-a-year CETV on their new client’s behalf.
 
Both parties then get a much longer timeframe in which to carry out the transfer if the client decides to go ahead.
 
Post-Brexit DB pension exit?
 
So are we facing a mass exodus from funded final salary pensions in favour of defined contribution ones? If the cash equivalent transfer values on offer today were the only factor in the equation, the answer would probably be yes. Thanks in part to Brexit and the underlying global economic conditions, final salary pension transfer values are unlikely to ever be this high again. 
 
However, it’s rarely all about the money. Ditching a final salary pension means forfeiting a guaranteed, index-linked income for life; that’s not to be sniffed at, especially considering the economic climate of the past decade.
 
As a result, many people will prefer to stick with what they have. That means no matter how big a carrot funded defined benefit pensions are willing to offer members to transfer out of the scheme or how numerous the benefits of transferring out might be, there will still be members who remain in the funds to keep the lights burning.
 

Author: Tom Conner
Posted: Tuesday, January 31, 2017 | 5:20:53 PM


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