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Defined benefit pension savers warned of ‘knee-jerk’ transfer decisions

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Savers looking to transfer from a defined benefit to a defined contribution pension during the coronavirus crisis are being warned of the risks by the regulator.

Those wishing to transfer their defined benefit (DB) pension to a defined contribution (DC) pension are set to receive letters from the scheme warning them of the risks of such a move during the pandemic, and urging them to consider the decision very carefully.

As part of the guidance published by The Pensions Regulator (TPR), letters are expected to state that the move is unlikely to be in savers’ best long-term interests.

This is because Covid-19 is causing market volatility, uncertainty for personal finances as well as an increase in scams.

Since the dawn of pension freedoms in 2015, savers have enjoyed more flexibility in how they can access their pension. Many have taken advantage of this flexibility and last year £34bn was transferred out of DB schemes.

Charles Counsell, TPR’s chief executive, said: “We are determined to do all we can to protect savers’ retirements from the unprecedented impact of Covid-19.

“A decision to transfer a pension pot that’s taken a lifetime to build is a very serious one and we’d urge members to be very, very careful making any transfer decisions at this time.

“That’s why for the foreseeable future, anyone who is looking to transfer their benefits out of their DB scheme should be sent a new warning letter to make them stop and think as well as point them towards free, impartial guidance available from The Pensions Advisory Service.”

Protection against pension scams

The regulator is also calling on trustees to highlight the free, impartial pensions guidance from Pension Wise, encourage members to take regulated advice to understand retirement options, give appropriate warnings of the risks and implications of their decision and send letters to DB savers who are requesting a cash equivalent transfer value (CETV).

TPR is also urging trustees to direct customers to the ScamSmart website to learn how to protect themselves from pension scams. Recent figures reveal victims of pension fraud lost an average £82,000; for some that was their life savings. TPR said trustees are the first line of defence in protecting retirement funds and have a key role in ensuring members make informed choices.

Nathan Long, interim head of policy at Hargreaves Lansdown, said: “The current Covid-related crisis means that some people need to look for alternative sources of cash, possibly in a hurry. Defined benefit scheme members face two different kinds of risk if they are considering transferring their final salary pension to release cash.

“Firstly, they are giving up a guaranteed pension; the scheme they transfer to will very rarely offer such good value for money and it’s a one-way street: once you’ve transferred out you can’t go back. Generally, it’s not a good deal to transfer out and you’re better looking for alternative sources of cash, even if it means borrowing.

“Secondly, you could be putting your money into a scam, an investment scheme specifically designed to steal your savings.”

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