Most people approaching retirement choose an income later in life rather than an option of more cash today and drawing their pension early, according to the latest research from the pensions team KPMG.
Mike Smedley, Pensions Partner at KPMG in the UK commented “There has been much speculation about the Budget impact and whether we will make good decisions about our pension savings. Rather than shooting in the dark, we have looked at the closest example there is in the UK - how people use the existing flexibility, particularly individuals with material pension savings in defined benefit schemes. This suggests that around 1 in 4 seek to withdraw their pension as quickly as possible but the majority are savers rather than spenders.”
“The fly in the ointment is the year of uncertainty that individuals now face. If you are approaching retirement do you buy an annuity or wait for the flexibility in the new system? And if you’re in a defined benefit scheme do you rush for the door to transfer before the shutters come down? Or wait and hope that Government doesn’t introduce a ban?”
KPMG analysed eight “Flexible Retirement Option” (“FRO” or sometimes known as Total Pension Increase Exchange) exercises during 2013 in which over 2,000 members of defined benefit schemes who were eligible to retire early (typically over 55 years old) were able to immediately draw their pension in a more flexible form tailored to their personal circumstances (eg higher tax free cash, immediate pensions without future increases and without spouse’s benefits).
In total, 25 percent of members decided that the FRO was the right thing for their circumstances. The research also showed a clear appetite among members to take up the offer of independent financial advice which is a mandatory part of these offers under the Industry Code of Practice. The proportion of members engaging with IFAs was typically around 50 percent.
Alan Pentland, Pensions Partner at KPMG in the UK, commented: “Our research suggests that people consider their retirement choices very carefully. They certainly don’t all seem to want to rush out to buy Lamborghinis. We have always said that moving out of a defined benefit scheme to take up a flexible retirement option is definitely not for everyone. But for some people it does make financial sense based on their individual circumstances. The take up rates in our latest research seem to bear this out with one in four deciding to transfer but the majority, three quarters, deciding to stay put.”
KPMG’s Member Options survey also looked at “Pension Increase Exchanges” (“PIE”s) which are offered to pensioners that have already retired and are drawing their pension. PIEs allow members to exchange future pension increases for a higher pension today. KPMG analysed seven of these exercises covering a total of 100,000 members. The take up rate was higher than for FROs with take up rates averaging 30%.
Alan Pentland commented: “Members who have already retired have a better idea of their income and lifestyle needs than those who are yet to finish their working lives and may welcome the additional benefit flexibility that a pension increase exchange can offer – for example providing a greater income when they are younger and have more financial commitments. Those who take up the offer are still in the minority however, with seven out of ten choosing to stick with their current entitlement.”
Will “Enhanced Transfer Values” make a return?
KPMG’s research suggests very little activity in terms of “Enhanced Transfer Value” (“ETV”) exercises, under which defined benefit scheme members who are not close to retirement (typically under 55) are offered the option to transfer their scheme benefits to a defined contribution scheme during 2013. But Alan Pentland questions whether they may make a return following last week’s Budget announcement?
“The changes announced in the Budget are a real game changer in terms of the relative attractiveness of defined contribution compared to defined benefit pensions. As a result we might well see more ETVs being offered especially as there are some concerns that there could be legislative moves to prevent people transferring out of defined benefit into defined contribution meaning that there could be a limited ‘window of opportunity’ for those who want to do this before they are potentially prevented from doing so."
A member of a defined benefit scheme wanting to transfer to a defined contribution scheme need not wait for their employer to launch a formal ETV exercise; they can request such a transfer at any time. Alan Pentland explains:
“Defined benefit scheme members have a statutory right to take their pension entitlement in the form of a ‘transfer value’ if they choose to. They may not get as much as if they took an ‘Enhanced Transfer Value’ as these offers tend to be over and above the statutory minimum. But they can do so if they want to by asking their pension scheme.”
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For further information please contact:
Margot Cowhig, KPMG Corporate Communications
T: 0207 694 4246
M: 07920 274856
KPMG Press Office: +44 (0) 207 694 8773
KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and operates from 22 offices across the UK with approximately 11,500 partners and staff. The UK firm recorded a turnover of £1.8 billion in the year ended September 2013. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. It operates in 155 countries and has 155,000 professionals working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.
This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.