The new flexible defined contribution (DC) pension arrangements announced by the Chancellor earlier this year should spark an increase in demand for transfers out of final salary pensions, according to research by Towers Watson.
According to the research 9% of employees approaching retirement with defined benefit (DB) pensions think they would be interested in exchanging most or all of this pension for a DC pot that they can dip into as they wish. A further 11% would be interested in exchanging half of their DB pension and 24% in exchanging less than half of it.
Will Aitken, senior consultant at Towers Watson, said: “Prior to the Budget, hardly anyone was interested in exchanging their final salary pension – which was often deemed to be more generous and more secure – for a forced annuity defined contribution arrangement.
“Transfers will now become a mainstream choice which pension schemes need to cater for. For example, we’re now seeing DB schemes considering whether to include transfer values on all pension statements so that members approaching retirement can clearly see what their choices are. At the moment, this information has to be specifically requested, leaving many people with little idea what size of DC pot they could swap their DB pension for.
“Most people interested in transfers ideally want to keep some DB pension, but schemes usually offer an ‘all or nothing’ choice. In practice, this means that people with two DB pensions from different employers might keep one where it is and exchange the other for a DC pot.
“Transfers can only grow in popularity from their current – virtually non-existent – levels, especially now that less tax will be due when unused DC pensions are passed down the generations. However, it would be foolish to predict a stampede to the exits. It is human nature to stick with what we have, and a secure lifetime income is not something to give up lightly."
Attitudes to annuities
The research also reveals some contrasting attitudes to annuities among those approaching retirement. Most employees are primarily concerned with income security when assessing the best retirement income options for them, for example three-quarters (76%) want to be guaranteed that their money will last throughout their lifetime, two-thirds (68%) are keen to protect their income from inflation and over half (57%) of married respondents aim to provide an income for their spouse after their death. However, only 28% say they’ll use the majority of their DC fund to buy an annuity, one of the few options available that would provide the kind of security that is being sought.
Will Aitken said: “The research has unearthed a contradiction in people’s attitudes to pensions. What they say they want from their retirement income looks and feels a lot like an annuity, but when confronted with that option, most shy away from it. Annuities have had some bad press over last few years but if you want income security in retirement then they’re hard to beat. It seems that financial education, above and beyond the Government’s plans for guidance, is likely to be required for people to realise what their options are and how they can benefit from the new flexibility.”
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