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Treasury hits pension transfer jackpot

Treasury officials have spoken to City regulator about the estimated £50 billion switched out of final salary pensions that could stimulate the UK economy.

Treasury hits pension transfer jackpot

Pension freedom reforms have spawned a new mini-industry around transferring valuable rights out of defined benefit or final salary pension schemes.

With 80,000 transfers going through over the 12 months to 31 March 2017, the market is clearly booming. Consultancy firm Mercer estimates £50 billion has been moved from schemes to individuals since the pension reforms were introduced two years ago.

Most of the money has been switched to defined contribution, or money purchase, schemes where the ultimate pension will depend on how much an individual has put in his or her pot and how much it has grown.

This has created a bit of bonanza for fund managers, who get a chance to attract more money for them to invest in bonds and shares.

Such a huge movement of capital is clearly not only interesting to the Financial Conduct Authority (FCA), which is inspecting the quality of financial advice in this area, but also to HM Treasury.

A freedom of information (FOI) request made by Citywire’s New Model Adviser® asked the Treasury if it had held any meetings with the FCA to discuss DB transfers.

The answer was yes.

The Treasury responded: ‘A telephone conference with the FCA staff on the specified subject [DB transfers] took place on 15 March 2017. Two Treasury policy officials participated, but no ministers.’

Hitting the jackpot

The Treasury was as tight-lipped on the matter as its grip on the nation’s purse strings, but its interest in DB transfers will stem from its desire for the pension freedoms to succeed.

The Treasury made £1.2 billion more than expected in tax receipts from the freedoms last year (totalling £1.5 billion). But the flow of money is also boosting consumers’ bank accounts.

Indeed, the rise of DB transfers was recently described by Standard Life as having created a new wave of unexpected ‘lottery winners’.

With the rise of these new lucky DB transferees, it is inevitable they will use some of it on consumption, such as helping their children pay for their first homes (or even buying new sports cars).

So perhaps the Treasury’s interest is not just in the tax take, but how DB transfers might help inject a little more life into the economy as the older generations flex their newfound spending power.

Everyone’s a winner

Transfers are also a way for large corporations to get rid of long-term DB liabilities, freeing up the businesses for growth. The Financial Times reported in June that one financial services company used transfers to knock off £100 million from pension liabilities over a six-month period.

The UK economy grew by just 0.3% over the three months to June. Throw Brexit uncertainty into the mix and it is clear to see why the Treasury would be interested in pension cashflows. Not only does the Treasury not want to see any limits placed on the pension freedoms, it will be happy with the short-term effect of the billions moving through the system because of transfers.

It has been said before that the amounts shelled out by banks over payment protection insurance (PPI) claims did more to aid the recovery than quantitative easing from the Bank of England – PPI was more effective at putting spending money in peoples’ pockets electronic money printing.

Therefore the Treasury would have no reason to want the FCA to stem the tide of transfers.

What was said or was not said at the meeting between the Treasury and FCA on pension transfers is unlikely to be made public. But it is clear that while financial services has enjoyed the churn generated from the pension reforms, the Treasury has also been a winner from the DB transfer glut.

9 comments so far. Why not have your say?

Ray Henderson

Aug 04, 2017 at 17:57

I always thought that pensions were in place to provide an income in your old age. Just another example of the financial irresponsibility of the Tory government, allowing people to squander their pension funds to give a short term boost to the economy. Then of course in their old age they will claim benefits off the State because they have no pension.

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mark antrobus

Aug 04, 2017 at 21:41

Do these people really understand the rights they are giving up?

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Aug 04, 2017 at 23:33

QE was never about the real economy.

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Aug 21, 2017 at 08:00

But when transfer values are 40 x pension payouts,

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Rob Guy

Oct 26, 2017 at 09:03

At Mark and Ray,

You cannot escape a simple fact - its their money, let people do what they want with it. There are enough rules reference lump sum withdrawal balanced tax etc.

My wife has a state 'gold plated pension'. Yes it has great benefits BUT there are drawbacks. We will transfer it from the state into a new SIPP for her over next few months I know what I am 'giving up' as equally I know what I am gaining. Control, decent Lump cash, ownership , and AWAY from the state

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Oct 26, 2017 at 10:18

Ray, I suspect that there are also many like me who will not squander their pensions for the "today, now" lifestyle. I would hate the thought of being under the control of the state in my last days. Even with lower income and with risk, I prefer to have control of my pension savings.

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Oct 28, 2017 at 11:09

Ray and Mark, if you are single with no dependants then transferring from a DB scheme to a SIPP is a no-brainer if you have sufficient other assets.

Nothing worse than people trying to dictate to others what they should do with their money. IFAs will only sanction pension transfers if they think it's in the best interests of their clients, that's the big difference between today and the 90s and therefore, there will be fewer examples of miss-selling.

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Antony A

Nov 17, 2017 at 15:08

I've recently transferred a DB scheme based on 5 years of employment to my SIPP; I only got a multiple of 21 times benefits, but to me the decision was a no-brainer. I fully understand what rights I am giving up; the problem is the rights aren't anything special. Why would I let my DB pension sit growing at just the rate of CPI for the next 20 years, because the trustees invest mostly in gilts as their priority is to pay current retirees? As a future retiree, I want the "fund" underlying my DB pension income to grow as much as possible. The interests of current and future retirees in a DB scheme are fundamentally misaligned, plus there's always the risk of the company that runs the scheme may go bankrupt or be taken over and the income is suddenly not "guaranteed" at all.

My old employer was in fact taken over recently, and one of the first things the new owners did was say that in future any employee who missed work due to illness would only be paid statutory sick pay, not their normal salary. This kind of idiocy - because now of course every sick employee is going to come to work, come what may, coughing and wheezing over everyone else - says everything you need to know about their likely commitment to the pension scheme.

As it was, my transfer value was large enough that if I invested it and were able to take out 4% in dividends now, I would already have the same income as my DB scheme was promising. I know the SIPP income isn't guaranteed, but I think it extremely likely that I can beat CPI over the next 20 years, so I will probably end up with substantially more income if I manage my own money up to and after "retirement", whenever I want that to be.

Additional factors that swung my decision were:

- the lump sum is now mine, not the pension scheme's. If I really need to take out £50K over a few years to help out my child or to pay nursing home costs, I can do this. I'll take a hit on income, but so be it. At least I have the choice!

- I anticipate I will have plenty of income from other sources - my state pension and my unmortgaged BTL rental income, so I can afford to invest my SIPP more aggressively than any DB scheme would ever countenance.

- when I die, my wife can continue taking 3-4% in dividends, or nothing, or £50K, as she wishes. With the DB scheme, she will suffer an immediate 50% drop in income.

- when my wife and I are dead, anything left in the SIPP can be inherited by our daughter, whereas the DB scheme dies with us. If we budget and invest carefully, the SIPP could be the basis of a ready-made pension for our daughter, compounded up over decades and all free of inheritance tax.

People who denigrate those who choose to transfer their pensions should not be so quick to pass judgement and assume everyone is going to spend it. If I had a tiny pension worth £10,000 in transfer value, why not, yes, take the cash and spend it, rather than wait for a dribble of £400-off a year for the next 15-20 years? And if I had a pension worth £100K, why not transfer that to a SIPP and grow the heck out of it for 20, 30, or even 40 years, including after you start drawing-down benefits, rather than assume that £5,000 a year, index-linked (and just £2,500 for your partner after you die), is the best you will ever do?

DB pensions were designed for a world in which almost everyone's only other retirement income was the State Pension: the DB scheme was a top-up, a collective system in which the contributions of current employees paid for the pensions of the retired ones. That world is now long gone for many people: they have portfolio careers, periods of employment and of self-employment, with little loyalty shown by either employer or employee, and employees have to fund their own top-ups; they also have rental income; they have substantial capital tied up in houses, which can be released by down-sizing; the whole of society is wealthier in real terms and people want to be able to leave significant assets to their children.

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Nov 18, 2017 at 12:01

I agree, Antony A. I had some difficulty transferring a pension of about £29.9k without the advice of an IFA but it went through in the end. It was not DB but there was a guarantee. The guarantee was for less about £800 income per annum. I reckoned that the guarantee was not so difficult to give up, considering that it related to reliable income of such a small amount. I thought the same about a single company pension scheme which has its own risks.

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