The average value of a final salary pension transfer rocketed to more than half a million pounds during lockdown as falling markets spooked those with smaller pots from transferring out.
Analysis by Lane Clark & Peacock, the pension consultants, showed the average value of defined benefit pension transfers reached £556,000 in the second quarter of 2020 — an increase of 30 per cent compared with the previous quarter — and the first time in three years that the average transfer has exceeded half a million pounds.
Only about one in five of those who received a transfer value quotation from their pension provider in this period opted to take the cash; the lowest quarterly take-up rate since 2016, according to LCP.
Although average pot sizes increased dramatically, the analysis also found that overall levels of transfer activity in the period fell by 25 per cent — partly because some pension schemes paused transfer quotations under lockdown, in line with regulatory guidance.
“It seems as though those with the largest pensions have been the least likely to be put off from completing a transfer,” said Ben Huby, partner at LCP, noting the different risk appetites of those with smaller pension pots who were more likely to be spooked by extreme volatility on global stock markets in the first half of this year.
“If you’ve got a smaller pension, market fluctuations mean more to you and the guarantee of an income looks more attractive,” he said. “It’s the difference between more sophisticated investors who pile in after a crash and those who pile out after a crash.”
The sharp increase in average transfer values during lockdown also reflected ultra-low interest rates as investors flocked to haven investments such as UK long-dated gilts, which are used to calculate the value of pension payouts.
While those with larger pots felt confident to go ahead with pension transfers during lockdown, LCP predicted there could be increased demand from those with smaller pots to tap pension wealth later this year as the furlough scheme comes to an end, and redundancies are expected to rise.
LCP has been monitoring transfer requests on a weekly basis across the 80 schemes it administers since the beginning of lockdown. While there was a sharp reduction in transfer quotation activity during March, April and May — with the rate of requests falling to well below 50 per cent of pre-lockdown levels — this has picked up since June. LCP said activity was now running at about 75 per cent of pre-lockdown levels.
However, the pensions transfer market is entering new territory due to a ban on “contingent charging” — due to come in on October 1. Contingent charging means financial advisers only get paid if their client follows their advice to transfer out of a DB pension. However, the practice was banned by the Financial Conduct Authority because of concerns that the fee model led to conflicts of interest and poor transfer advice.
“[The charging changes] could have a big impact on the number of quotations requested,” Mr Huby warned. “It may also make it harder for members to get the right advice, as we expect it will lead to many advisers leaving the market.”
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