Pension schemes to issue coronavirus transfer warning to savers

The rise in final salary or defined benefit (DB) transfers has been one of the key trends since the pension freedoms were introduced five years ago.

Savers considering transferring from a final salary or defined benefit (DB) pension to an investment-based defined (DC) pension during the coronavrius crisis will be warned that doing so is unlikely to be in their best long-term interests, in a letter from regulators. 

Under guidance published today (29 April) by The Pensions Regulator (TPR), trustees are being asked to send DB members looking to move retirement funds a letter warning them of the risks of giving up a guaranteed income for life in order to withdraw money from their pension. 

The rise in final salary or defined benefit (DB) transfers has been one of the key trends since the pension freedoms were introduced five years ago. Last year £34 billion was transferred from DB schemes.

In the main, people who have made the switch have done so in order to take a lump sum out of their pension, during a period in which transfer values have been high compared to history. However others, typically those with other investments they can draw on for income (such as other pensions and Isas), have opted to transfer so as to take advantage of the greater flexibility DC schemes have in passing the pension on to younger generations of the family. 

Charles Counsell, chief executive of TPR, says:“We are determined to do all we can to protect savers’ retirements from the unprecedented impact of Covid-19.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." 

Ian Browne, a pensions expert at Quilter, says a key factor at play that may tempt savers to make the switch at the current time is the fact that “thefluctuations in bond yields and investment markets has increased potential transfer values, and many will be tempted by the opportunity to invest their retirement pot in a depressed market.”

He adds: “But the economic outlook is still extremely uncertain, and the relatively high transfer values should not be an automatic reason for a member transferring out. The guaranteed income from a defined benefit scheme should not be downplayed and a transfer will only be in a member’s best interest in the minority of cases.”

Under itsguidance, the regulator is also calling on trustees to highlight the free, impartial pensions guidance from Pension Wise, including phone appointments and online information. It is also asking trustees to encourage individuals to take regulated advice to understand their retirement options. Trustees have been told to stress the risks of transferring out of a final salary or DB pension scheme.

Commenting on the guidance to pension schemes, Vassos Vassou, a professional trustee at Dalriada Trustees, said: “Most trustees already highlight the risks to members of transferring and provide details of where they can get help with advice. Trustees recognise the pang of anxiety associated with members requesting transfers when our own instincts are telling us the transfer may not be in their best interests.

“The additional material the regulator is asking trustees to include in the information provided to members will provide sense and balance for members before they proceed with a what could be a life changing and potentially devastating decision.”

Additionally, the TPR is urging trustees to direct their customers to the Financial Conduct Authority’s ScamSmart website, which provides information on how individuals can protect themselves from pensions scams. 

There are concerns an increase of pension scams have been taking place during the coronavirus pandemic, despite a government ban on pension cold calling introduced at the start of last year. 

Former pensions minister Steve Webb, now a partner at consultants LCP, says that he has been flooded with emails from people worried about the slump in the market. 

He says: “It is vital that consumers are protected from con merchants who sound convincing but are actually out to prey on the vulnerable. It is shocking that at a time when we need to pull together there are people who see this as an opportunity to cash in on people's anxieties. 

“Savers need to check with impartial sources of advice and guidance before making big decisions about their finances, especially in the current climate, and not be pressurised into doing something they will later regret.”

Separate analysis from LCP found transfers out of final salary or DB pensions have notably declined following the steep market falls that have taken place over the past two months in response to the coronavirus pandemic.