DB pensions function on the basis that there is cross-subsidy between those who die young and those who live a long life. Individuals who think that they may lose out in that cross-subsidy may wish to think about a transfer, because in a DC arrangement dying early in retirement simply leaves a larger, unspent balance in the pension fund to pass on.
A final concern that may be relevant for particular schemes is the risk that the sponsoring employer of the DB scheme might become insolvent at a time when there is a deficit in the scheme.
There have been recent high-profile examples of this, such as Carillion where scheme members have ended up in the lifeboat Pension Protection Fund (PPF).
While the PPF is an excellent scheme and provides much more peace of mind than would once have been the case, it will not generally pay out the full pension that someone would have expected.
Those who are under pension age when the scheme goes into the PPF will immediately suffer a 10 per cent ‘haircut’ on their pension, and all members will get only the statutory minimum level of annual indexation of pensions in payment. This amount is based on the consumer price index measure of inflation – not the retail price index, which many schemes still offer – and applies only to service since 1997.
A client who has serious concerns about the risk of facing this cut to their pension rights may prefer to transfer out so that the value of their pension is unaffected by whatever happens to their former employer.
Plan carefully
There is clearly a great deal to think about when advising on transfers and a lot of information for clients to take in.
But if they have understood from the outset the basics of the value of what they currently hold, and the potential attractions of the post-transfer world, this is likely to lead to a more satisfactory engagement with their adviser and perhaps reduce the risk of clients ‘insisting’ on a transfer that the adviser believes is inappropriate.
This article is a summary of a consumer guide on pension transfers, which many advisers send to clients who express an initial interest in a transfer.
The full guide can be downloaded from www.royallondon.com/goodwithyourmoney
Sir Steve Webb is director of policy at Royal London
