Written by
Peter Bradshaw

Published
06 Apr 2016

Final salary to defined contribution are your people making this transition?

06 Apr 2016 • by Peter Bradshaw

Employees want change

The latest research from Close Brothers Asset Management found over a third of employers have had enquiries from staff asking about making a transfer. With this level of interest, it is vital for employers to make sure that their staff members are fully informed and taking the appropriate financial advice. 

The Budget reforms of April 2015 brought an overhaul of the pensions system not seen in a century. Those in DC schemes are no longer required to annuitise at retirement; instead they can opt to drawdown from invested pension pots, take cash lump sums or purchase an annuity, or a combination of these options. 

However, the new flexibilities do not apply to those in final salary schemes, leading many to consider transferring out of DB schemes. Our latest data shows there were twice as many people looking to review their DB scheme in the nine month period following the introduction of pension freedoms, compared to the same period in the previous year.

Moving into a DC scheme is not always the most appropriate option. It’s crucial that any transfer is in the employee’s best interest and employers have a duty to ensure that members have taken proper financial advice before allowing a transfer to take place. For instance, although transferring out of a DB scheme holds the key to accessing pension freedoms, these gold plated pensions do offer guaranteed, inflation-proofed income, which continues to be paid out to a spouse after death. However, there are several instances where leaving a DB scheme could prove to be in a member’s best interests such as:

•    Poor health – individuals may need a lump sum to pay medical costs. 
•    An active family life - provisions for grandchildren, which may need to be taken into consideration.
•    Family situation – if single, a DC scheme may make better sense as the spouse’s death benefits provided by DB schemes are irrelevant.
•    Moving abroad – moving costs and real estate purchase will require a lump sum. 
•    Pot size – if individuals have a small DB pot, capital can be topped up by moving to a DC scheme.

Demands are changing

Equally, demand for flexibility has risen as people approach their retirement. Recent research* shows that in the ‘at retirement’ age group, as many as 61% prioritise income certainty. However, a similar number also want flexibility, showing that flexibility is increasing in importance when it comes to retirement planning. 

Paying down debt was one of the main drivers of the pensions “dash for cash” in the immediate aftermath of the freedoms, with nearly one in two showing intent to do so. The NAPF** found that one in five pension savers plan to use the cash on home improvements, and flexibility can also come in useful for those who continue to work through retirement, and may not need a full retirement income in the early years, but will need more later in life. 

Pension freedoms appear to have made many employees reassess whether remaining in a DB scheme will be the best option for them. However, it is important for employers to recognise that any employees considering transferring from a DB scheme are aware such a move is not suitable for everyone, and a decision as complex as this should not be made hastily, but with the support of a suitably qualified financial adviser. 

As awareness of the impact of the pension reforms continues to grow, we expect the interest in pension transfers to remain strong, and demand for financial advice will also increase. Employers should tackle this head on to ensure that their staff are educated about their options for retirement and, especially, know where they can receive the specialised financial advice necessary to make the best decision for their financial future. 

References


*Aegon Secure Retirement Income http://www.actuarialpost.co.uk/article/aegon-launch-guaranteed-drawdown-8244.htm 

**NAPF http://www.napf.co.uk/PressCentre/Press_releases/0461-82-per-cent-positive-about-pension-freedoms-but-many-worried-about-risks.aspx