Pension savers are increasingly resorting to transferring out of their final salary schemes, as the number of transfer requests has bounced back to pre-pandemic levels.
More and more people are expected to take their money out of their “defined benefit” pension schemes in favour of more flexible defined contribution schemes, experts have said. Many over-55s will be forced to unlock much-needed cash as a result of the financial difficulties caused by the economic downturn during the pandemic.
This is despite City watchdog the Financial Conduct Authority stepping up its efforts to crack down on poor advice.
During lockdown, the Pensions Regulator also warned savers of the dangers of transferring their money out of existing schemes after an increasing number were tempted to tap their pot as a source of income during the current straitened times.
In response, it asked pension trustees to send a letter to savers considering making a transfer during the pandemic, urging them to reconsider as it may not be in their best interest.
Fewer savers made transfers during the early months of the outbreak of coronavirus, according to figures from consultant XPS Pension Group. The number of transfers hit the lowest levels in years and was a third lower than the levels seen through most of last year.
During the lockdown, the Pensions Regulator adapted the rules to allow trustees to suspend transfers for up to three months to the end of June if it was in the “best interests” of their members. This meant that savers who wanted to ditch defined benefit pensions as their employers struggled to survive may have found themselves trapped by trustees. Most schemes are no longer blocking transfers.
Activity has now bounced back to last year’s levels with an average of just over six in every 1,000 eligible members transferring each year, which represents roughly 40,000 people, said Mark Barlow of XPS.
He said: “We expect an increase in the number of transfers as people come out of lockdown. There may be a backlog with some who would have been actively looking to transfer in March but didn’t. There is also a lot going on in the economy that may make people focus on their financial planning, including the end of furlough and new health concerns that may make them start to plan their inheritance.”
Transfer values have continued to creep up throughout May, with the average value of £258,600, up from £249,300 at the end of April, according to XPS data. This increase was a result of a rise in long-term inflation expectations during the month.
Jane Ralph of consultancy Barnett Waddingham said she also expected an increased interest in transfers, as the effects of Covid-19 on the economy became clearer and furlough schemes ended.
She said the number of transfer requests started to pick up six weeks ago as an increasing number of people who would not have previously inquired have now been forced to consider the option because they need to access savings. Many will have found themselves financially stressed, she added, and will want early flexible drawdown.
The consultancy group said it expects to see more schemes impose reductions to transfer values to reflect their worsening funding position and protect their overall finances as a direct result of the pandemic.