Savers risk running out of money seven years earlier by transferring from defined benefit scheme

Pension savers who move out of their employer´s defined benefit scheme risk losing up to seven years of retirement income due to avoidable charges, a new report has warned.

The pension freedoms have transformed how UK consumers view their pension, says pensions consultancy XPS Pensions Group. However, one of the unintended consequences is that those transferring away from their employer´s scheme can end up losing money after making poor decisions on where to transfer their pension.

XPS analysed over 6,000 pension transfers for its report, ‘Member Outcomes under Freedom and Choice´, and found that 95% of transfers from a defined benefit scheme go to a personal pension or SIPP. The charging structure of the retirement vehicle chosen to receive a transfer can have a significant impact on retirement outcomes.

Depending on the choice of receiving vehicle, an individual transferring a £230,000 defined benefit pension could:

• Run out of money seven years earlier (at 81 rather than 88) if they draw an income of £10,000 a year
• Receive an income £2,600 lower (£8,100 rather than £10,700) over their expected lifetime
• Leave an inheritance £340,000 lower (£500,000 compared to £840,000) at the end of their expected lifetime
• Buy an annual flat annuity at age 75 that is £4,000 a year lower (£18,500 compared to £22,500)

Figures from the Office for National Statistics suggest that up £42bn could be transferred from occupational pension schemes in 2018.

Wayne Segers, principal at XPS Pensions Group, emphasised the importance of employers, trustees and advisers ensuring that pension savers are supported in making good decisions with their pension savings.

“Given the amounts of pension savings being transferred and the range of outcomes people face, more needs to be done to ensure people don´t lose out in retirement,” he said. “Recent high profile cases have highlighted the need for employers to take ownership to ensure members don´t make poor choices that may lead to reduced income in retirement and the risk of employers themselves being criticised in retrospect. Better support and education is needed so that those choosing to move their pension away from their employer´s scheme make an informed decision.”