Defined benefit (DB) pension transfer activity has been on the decline over the last few years, but the last three months of 2020 were the worst in terms of take-up rates.
According to analysis by advisory firm LCP, the overall take-up rate for quotations in Q4 2020 was just 15%. This marks the lowest level since pension freedoms were introduced in 2015, compared with an all- time high of 34% in 2017.
The last quarter of 2020, however, was also when the Financial Conduct Authority’s ban on contingent charging came into force, meaning that clients need to pay for the advice received regardless of whether they decide to transfer out.
Take-up rates impacted transfers of all sizes, but LCP found that the upper mid-range saw the biggest drop.
Just 12% of transfers quoted between £400,000 and £800,000 ($1.1m, €931,100) in Q4 2020 were paid out. This compares with 32% the previous year, before the ban, and a high of 51% in Q3 2017.
In comparison, rates for transfer quotations over £800,000 fell by significantly less, from 48% in 2019 to 35% in 2020.
Cost of advice a ‘deterrent’
Quotation rates have, however, stabilised in the first half of 2021, LCP found, sitting at an annualised rate of 5.4% of deferred members, a number closer to pre-covid levels; but latest data shows a fall in activity in July and August.
Rates continue to be higher for those aged 55+. Around 7.5% of members within the age group requested a transfer quotation in the 12 months to 30 June 2021, compared with just under 3% of those under the age of 50.
Overall, 62% of quotations were paid to members aged 55 and over and 10% to those under 50.
Bart Huby, partner at LCP, said: “DB transfer activity has been in gradual decline for several years, but the ban on contingent charging seems to have reinforced this trend, effectively hollowing out the middle market.
“In contrast, there has been much less impact on the largest pots, where the advice cost is still relatively modest compared to the amount transferred.
“But for average transfer values, an upfront advice cost running into thousands of pounds, and for advice which may be not to transfer in any case, is increasingly acting as a deterrent to transfer activity.”
