Transferring a final salary pension? Here’s where those pots usually end up

Linda J. Dodson

Pension savers are more likely to take advice about transferring out of their final salary pensions as a result of financial losses incurred during the coronavirus outbreak, City watchdog the Financial Conduct Authority (FCA) has warned. 

Billions of pounds have been transferred out of final salary, or “defined benefit”, pensions into more flexible but risker “defined contribution” pension schemes since the April 2015 freedom reforms.

Financial advisers have come under the scrutiny of the FCA, which has warned that “too much advice is still not of an acceptable standard”.

However, that is not to say that transferring is the wrong choice for everyone. So for those who do transfer, where is the money going?

Nearly half of pension transfers are sent to traditional insurers, such as Prudential and Royal London. This option offers a relatively low-cost solution for pension savers, which includes the cost of managing your money. That is according to research from pension consultant LCP, which tracked down the destination of 1,250 transfers made during 2018 and 2019 worth a total of £500m.

The transfers made to insurers generally represented the smaller end, with an average transfer value of just over £300,000, the report found. 

More than a quarter of transfers were made to independent investment platforms, such as Hargreaves Lansdown or AJ Bell. These transfers tended to be larger with an average of around £490,000 per member, the report said. 

Typically, those transferring to investment platforms will be able to manage their own investments via a self-invested personal pension and have access to a wider range of investment options. Some of these could potentially be high risk, LCP warned. 

Just under a quarter of all transfers went to wealth management companies with a financial adviser arm, known as “vertically integrated advisers”. Here, the average transfer value sat at £410,000. Fees paid towards the ongoing management of these transfers can be high compared to traditional insurers, LCP said.

Wealth manager St James’s Place was the largest single beneficiary, with 10pc of all transfers and an average transfer of £500,000. The second largest was Old Mutual Wealth, which is part of investment firm Quilter, with around 6pc of transfers at an average size of £320,000 each. 

Across the 1,250 transfers studied, the average transfer value was £380,000 for both 2018 and 2019.

However, there were 15pc fewer transfers paid out in 2019 compared with the previous year. This marks a continuing trend of a gradual decline since transfers peaked in 2017, the report said. 

Bart Huby, of LCP, said: “An important consideration is where the transferred money ends up.  The right answer will be different for each person, but consumers need to know they have a choice and should challenge their adviser about why they are recommending a particular destination and the different charges they will have to pay.”

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