80,000 people switch out of defined benefit pensions in a year

Employers offer record amounts to transfer out – sometimes 30x scheme’s value

A total of 80,000 people are estimated to have transferred their pension pots out of their employer’s defined benefit (DB) schemes in the last year*, according to data provided in a Freedom of Information request to Salisbury House Wealth, the leading financial advisor, by the Pensions Regulator.

Salisbury House Wealth says that defined benefit pensions have long been seen as the “gold standard” of pensions. This is because the employer sponsoring the scheme guarantees the payment for life at what are typically generous multiples of the former employee’s salary.

However, employers are now offering scheme members record amounts of money – sometimes of up to 30 times a scheme’s value - to switch out of their DB pensions for a cash lump sum to put into a personal pension. Employers are doing this in order to cap their escalating pension liabilities.

Salisbury House Wealth explains that transfer values have risen significantly and some employers are offering to boost them further still. The average transfer value of a DB scheme is now around £213,000, but transfer values on offer can equate to as much as £1.2m for a £40,000 income. 

In addition, exit penalties have fallen to just 1% from between 5-30% previously, making it cheaper to switch out. Recently increased personal pensions freedoms which give people more control over withdrawing capital is seen to be another benefit of personal pensions compared to DB schemes.

The ability to pass on the residual value of defined contribution pensions to children as well as to a spouse (which is not possible with a DB pension) is another advantage of switching out.

Salisbury House Wealth adds that recent high-profile corporate failures such as the collapse of BHS have highlighted that DB scheme members’ pensions could be at risk if their sponsoring employer becomes insolvent. Members are increasingly aware that they are unlikely to get the full anticipated value of their pension if their scheme has to be rescued by the Pension Protection Fund (PPF).

Tim Holmes, Managing Director at Salisbury House Wealth, says: “Defined benefit pensions have long been seen as the gold standard – but taking the cash for some individuals is an increasingly good deal. This said, it is not a decision that can be taken lightly and anyone considering this must get professional qualified advice before making any decisions”.

“Workers whose sponsoring employer is offering them a sizeable carrot to switch out will be very tempted to do so.”

Social Bookmarks