More than half of defined benefit (DB) scheme members chose to transfer out of their plans last year after taking advice from a financial adviser, research has found.
A survey conducted by Willis Towers Watson revealed 55% of members chose to transfer out of their final salary arrangement in 2016. This was higher than the previous year when just over one third (36%) opted for a transfer.
The consultant surveyed leading firms of financial advisers and combined this with its own experience to find out what more than 170,000 DB members in 350 schemes have chosen to do in the two years since the introduction of freedom and choice in April 2015.
It said the rise in transfers was part of an increasing demand from DB members for flexible pension options since former Chancellor George Osborne introduced rules allowing pension scheme members to take their entire pension pot as cash, effectively ending the obligation to buy an annuity. Previously only a 25% lump sum could be withdrawn tax-free.
Despite this, the survey found 43% of those who transferred out last year did buy an annuity, while just 4% took their funds as cash. The majority (54%) opted to draw down their fund over time or combine this with other options.
Willis Towers Watson also noted an increase in the number of scheme members undertaking a pension increase exchange (PIE), which allows retirees to reshape their pensions. An example is foregoing future pension increases in line with inflation in exchange for a higher flat-rate pension.
Some 35% of members chose a PIE compared with 27% the previous year.
Willis Towers Watson head of liability management Stewart Patterson said the survey showed that DB members were recognising the potential of transferring out offering them an income in retirement that better suits their needs.
However, he added: “Transferring will not be the right decision for everyone and an impartial financial adviser can help members to make the right decision for their individual circumstances.”
Patterson said members now expect their schemes to provide access to more options at retirement, something he expects to see employers adapt to as they realise expanding the options available to members could reduce scheme risk.
“We now expect those schemes where a ‘wait and see’ approach was adopted post-pensions freedom to move to further facilitate access to transfers at retirement,” he added. “We predict that over the next few years pension flexibility for members of DB schemes will become the new norm.”
Separate research commissioned by Investec Wealth & Investment, published this week, backs up Willis Towers Watson’s findings. The research, conducted online by PollRight among 108 intermediaries, found almost three quarters (72%) of advisers have received DB transfer enquiries, up from 68% in July 2016.
However, it also revealed reluctance among IFAs to provide DB transfer advice. The top reason given (71% of respondents) was that the risks associated with challenges to historic advice were too high. Nearly half (47%) of advisers said that the process is complex and clients are resistant to paying appropriate fees, while 45% cited a perceived lack of regulatory support.
Almost a third (31%) fear there is too much of a focus by the regulator on the ‘headline’ figures involved in a DB transfer at the expense of ‘softer’ client needs.
Investec Wealth & Investment head of intermediary services Mark Stevens said: “DB scheme transfers have increased the opportunities for IFAs to advise new clients on their pensions and broader financial needs. However, it’s a fast-changing market and the complexities and risks involved mean that in many cases discretionary investment managers are integral to the effective management of client portfolios.”
