Number of savers doing risky pension transfers on the rise

Savers are being warned that transferring out of a final salary pension could cost them thousands

The number of defined benefit (DB) pension transfer requests made since the coronavirus lockdown started is gradually rising, according to consultants Lane Clark & Peacock (LCP).

LCP says that last week it received 28 transfer requests for the 81 DB schemes it administers.

This is the highest it has received since the start of lockdown, but still less than the number it had in the first 11 weeks of 2020.

LCP says that since lockdown started on 23 March the number of requests to transfer out of DB pensions schemes has averaged 20 a week. 

The analysis is based on 81 DB pension schemes LCP administers. This covers around 65,000 members, of which 33,000 have not had their pension and are eligible to request a transfer.

Bart Huby, partner at LCP, says: “Whether this is a blip or the beginning of a trend is unclear at this stage, but it will be important for trustees to monitor carefully what’s happening on their own schemes so they can quickly spot any unusual or concerning spikes.

“While the large majority of schemes have seen a fall in transfer quotation requests, a few have seen increased activity - these generally being schemes where the sponsor covenant has been adversely impacted by the Covid-19 crisis, so some members may have increased concerns about the security of their pensions.”

What is a defined benefit pension?

DB pension schemes – sometimes called a final salary scheme - pay out a guaranteed income for life.

The amount they pay is linked to the number of years the recipient worked for a particular employer or the amount they earned.

If your employer does not have enough money in the scheme to pay you in retirement, you are covered by the Pension Protection Fund.

Pension freedoms introduced in 2015 now make it easier for people to transfer their money out into a pot that can be easily accessed.

Should you transfer out?

Pension savers are being warned against transferring their retirement funds from DB pensions into defined contribution (DC) schemes during the coronavirus pandemic as they could lose thousands of pounds.

DC pensions build up a pot with contributions from you and your employer which are then invested to give you a return when you retire.

The income you might get from a DC scheme depends on how much you pay in, the fund’s investment performance and the choices you make at retirement.

Savers who transfer their pot into a DC pension could be putting their money at risk because of market volatility and economic uncertainty caused by the coronavirus pandemic.

According to recent figures from Moneyfacts, a record number of people with a DC scheme saw the value of their pension pot fall, with only 11% of funds avoiding losses.

DB pensions are calculated on your final salary so are not affected by the current market turmoil.

Anyone looking to transfer from a DB to a DC pension during the COVID-19 crisis will get a letter from trustees telling them it is not in their best long-term interests.

Justin Corliss, senior pensions intermediary development and technical manager at Royal London, says: “Saving for retirement is a long-term strategy, and the proceeds often need to last for a long but unknown time-frame. If you have a DB pension and you’re considering transferring it, speak to your adviser and take heed of their advice.

"Fluctuations in investment returns or life expectancy will not impact DB members’ retirement income like they can if you are invested in a DC scheme.

“Transferring from DB to DC will be right for some people, but it’s one of the biggest financial decisions you can make, and once it’s done, it’s generally irreversible.”

Huby says: "Transferring a DB pension, particularly if this represents someone’s main pension savings, is a major once-in-a-lifetime decision.

"There is a risk in the Covid-19 crisis that people in short-term financial difficulties make a decision to transfer their DB pension that they ultimately regret."

Pension funds have suffered heavy losses as a result of the coronavirus pandemic. To find out more about how your retirement savings could be affected, check out our comprehensive guide on how to rebuild your pension.