Coronavirus: savers warned against risky pension transfers

Trustees to send letters to members shifting pension schemes during the outbreak

Savers looking to transfer cash from a defined benefit (DB) to a defined contribution (DC) pension scheme will be sent warning letters during the coronavirus pandemic.

New guidance from The Pensions Regulator (TPR) orders pension trustees to step in in this situation in case DB pensioners make hasty decisions due to the outbreak.

A DB pension scheme is one where your pension payout is based on how many years you have worked for your employer and the salary you have earned.

DC pension schemes allow you to build up a pot of money that you can then use to provide an income in retirement. Unlike DB schemes, under the DC system your pension pot is not a guaranteed fixed sum. 

The amount of retirement income you get will depend on how much you contribute and the performance of the pension scheme's investments. 

Since 2015, pension freedoms have given savers with a DC scheme more flexibility in how they can access their money. In 2019 around £9.4bn was withdrawn in cash from DC pension pots. 

Savers with DB pensions have tried to take advantage of this flexibility, and last year alone £34 billion was transferred from DB to DC schemes. 

What is the problem?

Market volatility and economic uncertainty caused by the coronavirus pandemic mean that savers could put their money at risk by making hasty transfer decisions.

Charles Counsell, TPR’s chief executive, says: "A decision to transfer a pension pot that’s taken a lifetime to build is a very serious one and we'd urge members to be very, very careful making any transfer decisions at this time.

"That’s why for the foreseeable future, anyone who is looking to transfer their benefits out of their DB scheme should be sent a new warning letter to make them stop and think as well as point them towards free, impartial guidance available from The Pensions Advisory Service."

Experts warn that transferring from a DB to a DC pension scheme will only work for a few people.

Ian Browne, pensions expert at Quilter says: “The guaranteed income from a defined benefit scheme should not be downplayed and a transfer will only be in a members best interest in the minority of cases.”

Savers who are seriously considering a transfer should be prepared for the impact the current economic climate might have on their pension pot.

Browne adds: “If members are still leaning toward a transfer, they must remember that in doing so they take on the investment risk, which is particularly challenging in the current market uncertainty.

“Even if members have a professional adviser, who carefully selects and monitors their funds, the volatility within the markets will have an impact.”

Beware of pension scams

Pension scams are devastating and can cause savers to lose all their retirement pot.

The most recent figures show that victims of pension fraud lose £82,000 on average.

Trustees are the first line of defence in protecting retirement funds and have a key role in ensuring members make informed choices.

To guard against scammers, TPR is calling for trustees to follow the code of good practice set out by the Pension Scams Industry Group.

The guide contains practical steps for carrying out due diligence and assessing transfer requests.

Trustees should direct their customers to the ScamSmart website to learn how to protect themselves from pensions scams.