New rules from the Financial Conduct Authority on pension transfer values are set to shake up this market, according to industry experts.
A joint policy paper from Lane Clark & Peacock and Royal London claims these new rules will change the conversation between scheme members and their advisers.
The paper suggests that this greater clarity about the relative ‘generosity’ of transfer values offered by different company pension schemes, could cause trustees of those schemes to review their policy on transfer values.
From the start of October financial advisers have been obliged to show clients how the transfer value they have been offered by their company pension scheme compares with a ‘transfer value comparator’.
This is an estimate of the lump sum needed today to buy an equivalent pension at retirement.
The TVC is based on the assumption that the money transferred is invested in ‘risk-free’ assets up to retirement and is then used to buy a guaranteed income in the form of an annuity.
The LCP research shows that for members 10 years away from retirement, the transfer value on offer will on average only be around 55 per cent of the ‘full value’ of the pension given up, according to the FCA methodology.
For members within a year of retirement, the transfer value on offer will typically be higher, with an average transfer value being around 75 per cent of the ‘full value’ of the pension given up
This research also shows that the range of transfer values offered by different schemes is very large. Some schemes are offering transfer values as little as 40 per cent of the ‘full value’, while others are offering transfer values of more than 80 per cent of the “full value”.
Financial advisers surveyed by Royal London were in general in favour of this new methodology.
Most agreed the comparison between two lump sum figures was easier to understand than the old concept of a ‘critical yield’ which was often used in advice conversations.
However most say that they do not think this will have a major impact on the volume of transfers.
Royal London director of policy Steve Webb says: “Around 200,000 people have transferred out of a company pension in the last couple of years. And with thousands more doing so every week, it is vital that they have a clear understanding both of the advantages of transferring and of the valuable benefits they are giving up.
“If this new way of assessing transfer values results in better informed conversations with impartial financial advisers before decisions are made, this would be a good thing”.
LCP partner Jonathan Camfield adds: “Our research shows people 10 years ahead of retirement who are considering a transfer will typically be told that they are giving up around half of the ‘full value’ of their pension.
“This does not necessarily mean that transferring is a bad idea, but it does show clearly that those who transfer out are forgoing a great deal of certainty about their future retirement income, and that this certainty is of considerable value”.
