DB pension transfers from so-called final salary schemes are becoming more popular.
Once considered the gold standard given excellent benefits, pension flexibilities introduced in 2015 are making it more attractive to switch.
For many that would not be a good idea but for some it represents a real opportunity.
Circumstances vary and, rather than taking a blanket approach across all potential DB transfers (as the regulator has done in the past), it is very much the situation now that each case should be looked upon entirely independently.
The variables of the relevant pensions and the individual client scenarios will differ so dramatically it is impractical to adopt a one size fits all approach.
For example, the situation for a childless couple, one of whom has a DB pension, will vary dramatically in comparison to a divorced parent with children, who also happens to have a DB pension.
Instantly, one can appreciate the passing of wealth down the generations is unlikely to be a concern for the childless couple, yet it may be a crucial factor for the divorcee.
In addition, spousal benefits contained within a DB pension – normally 50 per cent or 66 per cent of the annual income – are utterly without value to someone who is not married and has no intention of doing so, yet for the married couple it could be their prime consideration.
One retiree noted: “For me, it’s about control. If I pop my clogs tomorrow, my two boys will get nothing. If I can transfer it into a personal pension, at least they’ll get what I leave behind.
“I know at the moment the income is guaranteed and I’m quite prepared to give up that guarantee to get more control. It is my money at the end of the day.”
So it is important to escape the regulatory presumption that such transfers are always unsuitable.
Fiona Tait, technical director at Intelligent Pensions, told FT Adviser she expected the high volume of requests for quotations to continue.
Ms Tait said: “It is buoyed by three factors – the pension freedoms, high transfer values as result of record low interest rates and questions over the stability of some pension schemes following the demise of BHS.”
Millions of people with DB pensions, where income is based on salary and length of service, now have the right to move their savings into other pension arrangements.
While the schemes offer guaranteed, inflation-linked income paid by the former employer, they do not allow lump sum withdrawals and are less tax efficient on death. With defined contribution schemes the money can be handed down the generations. In DB schemes, if the spouse pre-deceases, then the money is lost when the pension holder dies.
Currently, the transfer terms for savers are particularly generous.
It is not unusual to be offered a “cash equivalent transfer value” of 40 or 45 times the projected annual income that a final salary pension would pay. So £6,000 of annual income could become £250,000 once moved into a personal pension.
In the wake of the BHS scandal and other collapses, one factor increasingly at the forefront of DB transfer decision-making is the financial stability of the sponsoring employer. If a DB scheme is underfunded, the employer becomes insolvent and it ends up in the Pension Protection Fund, then deferred members would only receive 90 per cent of their entitlement.
Members of final salary schemes can receive a transfer value free of charge once a year. But the offers are only guaranteed for three months.
There are 5.1 million deferred members of private sector DB schemes in the UK.