• Members benefit from both freedom and security
• Despite offering a means of reducing financial woes, few Defined Benefit schemes allow partial transfers despite regulations permitting them
Kate Smith, head of pensions at Aegon said: “Interest in DB to DC transfers is rocketing due to a combination of the pension freedoms, high transfer values and scare stories about DB sustainability. But choosing whether to give up a guaranteed retirement income for life, even with advice, is a big and complex decision, and many may be put off from taking the ‘all or nothing’ plunge. Transferring to DC does provide increased flexibility to take as much or as little retirement income from age 55 as and when it suits the individual. But in return, individuals take on the risk that they might outlive their savings or that a stock market downturn may reduce the value of their savings.
“Although allowed by regulations, many trustees and employers may have ruled out partial transfers because of the administrative complexities they could create. But in today’s climate, partial transfers could be attractive to employers and trustees as they can improve DB schemes’ financial health and the company’s balance sheet. Administrative challenges may not be insurmountable and trustees could draw on inspiration from the pension splitting rules.
“Some individuals are effectively barred from transferring out of DB schemes because while below the lifetime allowance in DB terms, their transfer value might be above the DC lifetime allowance and result in a tax penalty. This is another group who might benefit from being allowed to take a partial transfer to keep their overall pensions within the appropriate allowances.”
Background
DB members have the statutory right to transfer their pension to another pension scheme up to a year before their normal pension age, including to flexi access drawdown, but they don’t have the statutory right to partial DB transfers. It’s all or nothing, unless scheme rules allow members to split their DB pension. Partial transfers allow members to transfer part of the value of their DB benefits and part of it is retained by the scheme.
Partial transfers from DB schemes have been permitted since 2006, but most scheme don’t allow it, historically on the grounds of administration costs, as they need to adjust the remaining benefits, continue to keep records, and pay a scheme pension. It’s far simpler for schemes to get rid of the liability entirely by transferring the full amount.
DB savers don’t have the right to access the Pension Freedoms unless they transfer out of their DB scheme, after taking regulated advice, but doing so means they lose a valuable guaranteed income. Research consistently shows that people want to have both a guaranteed retirement income to meet their everyday living costs, but also want the flexibility offered by the flexi-access drawdown.
Allowing partial transfers could help employers manage their balance sheets, while making DB schemes more sustainable, which is likely to be attractive to trustees, although the administrative issues may be challenging. DB scheme deficits are on a roller-coaster, with a current combined estimated deficit of £419.7 billion at the end of September according to the PPF.
A large DB transfer value risks hitting the lifetime allowance of £1million and individuals facing additional tax charges, making decision–making, even with advice problematical. Allowing partial transfers allows DB members to benefit from all the advantages of the pension freedoms while mitigating against the downsides.
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