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DB transfers drop off as regulation and insurance costs bite

1 October 2020

As the FCA’s contingent charging ban come into force, data from the regulator shows that the number of defined benefit transfers has already fallen. by almost a third in the past year.

DB transfers made in 2019/20 fell 28% compared to the previous year, , with a total of 40,600 transfers made during the period, amid the regulatory crackdown on the market.

Commenting on the fall in transfers, Tom Selby, senior analyst at AJ Bell, said: “The pension freedoms announcement spurred an initial rush to exit DB pensions, with hundreds of thousands of savers opting to swap tens of billions worth of guaranteed income promises for a cash pot they can spend and invest as they see fit.

“This transfer activity inevitably slowed in 2019/20, in part as a result of an FCA crackdown on the market – including a proposed ban on contingent charging – and in part because many advisers have been forced to stop offering DB transfer advice due to the insurance costs involved.

“While clearly the regulator was right to stamp out poor behaviour in the market, the danger is that people for whom a DB transfer would be the right move will now be unable to access the advice they need.”

The FCA’s data also showed a 5.1% rise in the number of defined contribution pensions being fully withdrawn, although nine out of ten of these were for pot sizes less than £30,000.

However, of those using their pension funds for income, 42% were taking more than 8% a year, up on the 40% recorded during the previous period, the FCA said.

Selby added: “The fact the vast majority of full withdrawals were funds worth £30,000 or less is encouraging, while separate data published by HMRC earlier this year suggests people reduced or paused withdrawals as markets crashed in March and April. This points to savers being sensible and looking to ensure their pension lasts as long as they do.

“That said, there will always be people at the margins who spend their pension too quickly or simply don’t think about the consequences of withdrawing too much, too soon.”

Selby said that someone withdrawing 8% of their pension a year, assuming an annual investment growth rate of 4% and income rising in line with inflation at 2%, would risk depleting their pot within 15 years.

Stephen Lowe, group communications director at Just Group, said the figures raise concerns about the long-term sustainability of pension payments.

Lowe commented: “These are not people whose funds are so big they don’t need to worry. In fact, the larger the fund, the more cautious the withdrawal rate. More than half of those with £30,000-£100,000 pension funds are taking more than 8% compared to 28% of those with funds valued at more than £100,000.

“Today’s figures show more pension funds are being accessed, a higher proportion are being fully encashed and those who are taking income are taking higher amounts. Of those pots going into the relative complexity of drawdown, 27% were moved without advice or guidance which is higher than the 25% previously.

“We are more than five years into the pension ‘freedom and choice’ experiment and while giving people aged 55+ easy access to cash is undoubtedly popular, that doesn’t mean they are going to have more financially secure retirements.”

Meanwhile, the FCA’s data revealed that over a third (36%) of plans accessed for the first time in 2019/20 were done so without any advice.

Andrew Tully, technical director at Canada Life, warned that this could cause problems further down the line.

Tully noted: “The pension freedoms continue to be hugely popular but with this freedom and choice comes huge personal responsibility. Five years in we continue to see a drift away from financial advice as people choose to DIY drawdown. While others choose to strip their pensions at what most professionals would argue is an unsustainable rate of income.

“This may be OK if it is a deliberate strategy to deplete pension pots early, or over a set period, but my concern is we could be storing up trouble for the future if this data continues to tell a similar story in the years to come.”

Professional Paraplanner