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DB transfer ‘bad decisions’ costing people 7 years’ retirement income

15 August 2018

Pension scheme members with an average transfer value of £230,000 could be losing out on significant amounts of money, according to a new report by XPS Pensions Group.

The report Member Outcomes under Freedom and Choice found that those transferring from their employer’s scheme under the pension freedoms risk making poor decisions on where to transfer their pension and could lose up to seven years of retirement income to avoidable charges.

Depending on the choice of retirement vehicle chosen to receive a transfer, the report found individuals could run out of money at the age of 81 rather than 88 if they draw an income of £10,000 a year or receive an income that is £2,600 lower at £8,100 over their expected lifetime.

The report also showed individuals risk leaving an inheritance worth £340,000 less at £500,000 compared to £840,000 at the end of their expected lifetime. In addition, they could buy an annual flat annuity at 75 years of age that is £4,000 a year lower.

Wayne Segers, principle, XPS Pensions Group, said: “Members deserve better guidance from the pensions industry. Advisers, employers, and trustees can do more to help them at this vulnerable time. It is hard to escape the fact that the last place where collective, cost effective support can be provided to people is whilst they are still members of their employer occupational pension scheme.

“Charging structures can be complex and confusing and employees may end up paying for flexibility in investments that they don’t need and will never use.”

With a continued surge in transfers from defined benefit schemes expected, Segers said it will be important for UK companies to help their employees and ensure they are supported in making good decisions when it comes to their pension savings.

XPS looked at data since 2016, analysing over 6,000 transfers with a total value of £1.4 billion. The results showed that 95% of transfers from a defined benefit scheme went to a personal pension or SIPP, while the charging structure of the receiving vehicle can have a significant impact on retirement outcomes.

Segers added: “Recent high profile cases have highlighted the need for employers to take ownership to ensure members don’t make poor choices that may lead to reduced income in retirement and the risk of employers themselves being criticised in retrospect. Better support and education is needed so that those choosing to move their pension away from their employer’s scheme make an informed decision.”

 

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