DB schemes: three ways to benefit from DC flexibility

Additional Voluntary Contributions (AVCs) are usually provided on a DC basis. As such they fall within the remit of the new pension flexibility rules and there are new options available to members – if the scheme permits.

Our research reveals that 73% of members in the schemes surveyed can now take their AVC pot as a single cash sum.  In many cases, it may make sense for a DB member to fund their tax-free cash entitlement from a DC pot rather than giving up part of their DB pension.  However, only 18% have made changes to an existing lifestyling strategy to reflect that AVC pots are no longer likely to be used to purchase annuities.

Schemes often routinely offer commutation of small pensions to eligible members at retirement.  The limits have increased so that individuals with entire pension savings of less than £30,000 or savings within a single DB scheme of less than £10,000 may take their benefits as a lump sum.  Only 21% of schemes had not amended their rules to permit the new higher limits.

It is also possible to offer commutation of small pensions in payment.  However, schemes and employers should note that a bulk exercise should be considered in light of the industry-wide Code of Practice on incentive exercises.  A review of the Code is under way and we expect the revised version will clarify the circumstances in which the Code applies.

Our research shows that around one third of schemes have seen an increase in requests for transfer value quotations since the flexibilities were introduced in April 2015.  However, this did not translate into an increase in transfer value payments.

The transfer value option can be attractive to both members wishing to access the flexibilities, and to trustees and employers wishing to de-risk their scheme.

Some schemes have taken action to help facilitate transfers for members who wish to do so:

• Where a scheme’s rules did not already permit transfers within a year of retirement age, around one third of respondents had amended their scheme rules to allow this
• 26% of schemes provide a transfer value quotation within a member’s retirement options
• 29% of schemes allow partial transfers

The advice requirement could be a limiting factor on the number of transfers going ahead.  Of schemes that do offer transfer value quotations at retirement as standard, around one third of the schemes surveyed are currently therefore choosing to facilitate free access to an independent financial adviser when a member requests it.