LCP is warning that some members who may benefit from a DB pension transfer may lose out because of a smaller pool of advisers and a plummet in transfer values.  

In order for a member to transfer their DB pension, they are required to take specialist advice unless the transfer value is less than £30,000. An LCP FOI request to the FCA has highlighted that in the last four years, the number of specialist advisers has plummeted. In May this year, there were 1,048 firms holding the relevant permissions. This is down from around 3,000 just four years ago. This means that it is now much harder for DB pension scheme members to find an advisor as they approach retirement to give them advice on what best to do with their pension.

Further, over the past year, Defined Benefit transfer values have plummeted – in some cases halving in value. A typical member aged 55 with a pension of £10,000 pa payable from 65 had a transfer value of around £250,000 at the beginning of 2022, but that has now fallen to around £130,000. This fall reflects the rise in the yields on government bonds, also known as gilt yields. 

Because of the way the law works, gilt yields are a key factor in determining DB pension transfer values. The higher gilt yields are, the higher the return anticipated on a pension scheme’s assets, and the lower the sum of money needed now by a scheme to pay a member’s pension when they come to retire, the lower the transfer value. The opposite is also true, so when long-term yields fall, transfer values tend to go up.

This dramatic fall in transfer values means that the option to take a transfer is looking a lot less valuable to members than it may have been a few years ago. Especially for those members who might have received a previous transfer value quotation and can see that the value has fallen sharply. This fall in transfer values combined with the fall in advisers is having a dramatic impact on the number of members transferring from DB pension schemes. However, for some people, transferring out would still be the right choice.

The latest data from LCP shows that the number of members transferring is at an all time low, with only 6% of quotations issued in the last quarter of 2022 subsequently being requested by members to be paid out. The 6% take-up rate is about one-third of the rate LCP saw over the previous five years to 2022.

Transfer rates are also being impacted by changes to the FCA’s rules and guidance around pension transfer advice and greater scrutiny from the FCA and professional indemnity insurers on advisers. While these changes have improved the quality of advice, it has also made advisers more cautious when it comes to recommending a transfer.

Clive Harrison, Partner at LCP, commented: “There is a slump in the pension transfer market with a double whammy of plummeting transfer values and an apparent exodus of advisers. A DB pension transfer could be in the best interest of certain members, but it is likely that we continue to see low levels of transfer rates for the time being. This could mean some people don’t get the best deal in their retirement.”