Changes in the way pension providers tell retirement savers about the value of their pension pots are on the way – and may trigger more transfers out of workplace schemes.
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The new rules may be a legacy of Brexit as pension firms will have to change the format of statements for defined benefit final salary schemes to include how much the fund and other benefits are worth.
Now, they are communicated as an annual pension income and few retirement savers are aware the underlying fund value is generally calculated as 20 times this figure.
So, someone picking up an annual retirement income of £25,000 has an underlying pot of £500,000.
The new rule is part of the European Union Institutions for Occupational Retirement Provision Directive (IORP II) which comes into force from January 13, 2019.
Clearer picture of how much fund is worth
Brexit formally takes place in March 2019, so it is likely the new rules will transfer into British law under the Great Repeal Bill currently progressing through Westminster.
Not only will companies have to give retirement savers a clear picture of the value of their pensions, the statement will be in a standard format across the industry for easier comparison of benefits.
The measure is expected to benefit deferred scheme members – those who no longer contribute to a scheme and may have lost track of the value of their funds.
Pension experts believe the statements will make more people consider switching out of final salary pensions.
“Most people do not know how much their pensions are worth. If you suddenly receive a letter with a value, you might be inclined to take it,” said former pensions minister Steve Webb.
Transfer requests up 50% in a year
“Many deferred members of final salary schemes appear largely in the dark about their pension rights. Most schemes do not regularly communicate with their deferred members, so many people have little or no idea of their current value if converted into a lump sum.”
Government and industry statistics suggest more retirement savers are seeking a transfer away from a final salary pension.
IFAs report requests for transfer advice has surged by 50% in a year – and currently only an estimated three in 10 direct benefit schemes provide transfer values on their annual statements.
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