Final salary pension transfers slow to a trickle
Savers have cashed in £30bn from ‘final salary’ pensions, but transfer rules are being tightened, reports Sam Brodbeck
Final salary pension transfers are grinding to a halt following curbs by the City watchdog and insurance companies’ fears of an impending mis-selling scandal.
At the same time, the portfolios of the hundreds of thousands who have already transferred have begun to suffer as a result of recent stock market falls.
As more cases emerge of savers who regret giving up gold-plated pensions, access to the “pension freedoms” is being restricted.
It is thought that since 2015 about a quarter of a million people have swapped guaranteed “final salary” pensions for “defined contribution” plans that allow far greater flexibility under the pension freedoms rules.
Transfer values have been incredibly generous – a £10,000-a-year pension can become £350,000 or more in cash – because of low interest rates. But the Financial Conduct Authority is worried that people have been too quick to give up guaranteed retirement income and may run out of cash.
A combination of the appeal of the pension reforms, which apply only to defined contribution arrangements, and sky-high cash offers has pushed transfers to extraordinary levels over the past couple of years. Official data suggests more than £30bn was moved out of final salary plans in 2017, compared with just £5bn in 2014.
But the pace of transfers is expected to slow to a trickle as financial advisers – who must be consulted for deals worth £30,000 or more – pull out of the market. As Telegraph Money has reported, savers have found it increasingly difficult to find advisers willing to help them move pensions.
Now that search looks certain to become even harder. Last month the FCA ruled that pension companies that offered free transfer reports to advisers were breaking EU “inducement”, or bribery, rules.
As a result some of Britain’s largest providers, including Prudential and Standard Life, have withdrawn their services, piling pressure on the few advisers operating in the transfer market. This dwindling group also faces rising insurance costs as underwriters increase premiums for what they judge to be high-risk business.
Alistair Cunningham, a pension transfer specialist at Wingate Financial Planning, said: “There have been far too many transfers over the past two or three years and now the market is moving the opposite way where advisers are too scared to give the advice and, because you have to get advice, many savers will not be able to transfer out when they want to.”
Choppy stock markets since the start of the year – the FTSE 100 fell by more than 10pc between January and March – have also begun to unnerve people who have already moved their pensions. For many, this will be the first time they have been responsible for their own investments and the reality of giving up the security of a company scheme will be dawning on them.
James Baxter of Tideway, a transfer advice firm, said: “This year will be tougher for people compared with those who transferred out in 2016 and 2017, who had a smoother ride. People coming out of final salary schemes now will get lower transfer values and could be down 3pc or 4pc. That’s not a big deal but if you’re not expecting it, it can be quite scary.”
‘I regret cashing in my £560,000 pension’
Engineer John Douglas, 53, was one of the first wave of people to transfer their pension to take advantage of the pension freedoms. Three years ago he returned to Britain after a stint working overseas and decided to leave his employer.
That meant he became a “deferred” member of the staff pension fund and was given an offer to swap it for a personal pension. His financial adviser recommended taking up the offer, which meant giving up an income of £28,000 a year from age 65 for £560,000 in cash.
He combined this with another £30,000 pension and put both into a self-invested personal pension (Sipp).
“My choice was influenced by the flexibility of investment choice,
improved death benefits and belief that my offer was generous,” said Mr Douglas.
“Depending on growth, I was also attracted by the possibility of withdrawing my pension early – at, say, age 60. Moreover, with my home worth £800,000 and interest-only mortgage debt of £300,000, the option of taking lump sums to reduce mortgage debt is appealing.”
Mr Douglas calculated that he would need to grow his Sipp to around £1.2m over 15 years to match what he had given up. “However, after three years of dismal growth, my Sipp is now worth around £570,000 and I am getting concerned,” he said.
Now on a more modest salary and with a wife and three young children, he is starting to have regrets.
“I have worked very hard and
I don’t want to see my pension flatlining or even shrinking,” he said. “Apart from the Sipp, my wife and I only have a couple of other small pensions. With expert advice my plan now is to get my pension pot back on course over the next 12 years before retirement.” As time passes, cases like Mr Douglas’s are likely to become more common, say advisers, as more transferred pensions fail to keep pace with company schemes. Yet actuaries predict that hundreds of thousands more people will still cash in final salary savings. Consultant Hymans Robertson has predicted that the number of final salary plans in Britain will plummet over the next 25 years from around 5,500 currently to just 1,000. This will be driven by some schemes merging, others falling into the Pension Protection Fund when employers fail and as many as a million transfers to alternative pension arrangements, according to the firm.
Mr Baxter said: “Things have quietened down a bit but there has still only been about £30bn of transfers out of more than £1.6 trillion of liabilities held by final salary schemes. We’ve just scratched the surface, we’ve only taken the foam off the pint.”
John Douglas gave up his final salary pension