DWP drops plans to prevent transfer of full pension from DB to DC schemes

After a three-month long consultation, the government is to drop plans which would have prevented members of defined benefit (DB) pension schemes from transferring their full pension to UK defined contribution (DC) arrangements.

Draft legislation published by the Department of Work and Pensions in June would have prevented the transfer of many DB pension rights to UK DC schemes.

This would have happened because contracted-out rights accrued in DB schemes can only be transferred to a restricted range of pension vehicles and the option to contract out of the state second pension into a DC scheme will being abolished from April 2012, so contracted-out DC schemes will no longer exist.

Not all DB pension entitlements would have been affected by this restriction, but most members of DB schemes would have been prohibited from transferring at least part of their pension to a standard UK DC scheme.

The DWP has said it will allow contracted-out DB rights to be transferred to contracted-in schemes when contracted-out DC schemes disappear in April 2012..

Steve Webb, minister for pensions, said: “The abolition of contracting out on a defined contribution basis will provide an important simplification for schemes and members.

“We listened to the views of our stakeholders during our recent consultation and we have decided to allow transfers from contracted-out defined benefits schemes to non-contracted-out schemes following abolition.

“However, we will introduce safeguards to ensure members are aware of the implications of transferring.”

Fiona Matthews, senior consultant at Towers Watson, added: “Ministers keep saying people responsible enough to have saved for retirement can be trusted to make their own choices about how to take their retirement income. Restricting transfer options would have been at odds with that. To its credit, the government has been prepared to think again.

“Ironically, the threat of this policy may have been enough to cause an increase in the number of DB to DC transfers over the next year. Many organisations looking to reduce their pension liabilities were already thinking about offering former employees incentives to take their benefits elsewhere.

“Faced with what looked like a now-or-never window, several have accelerated their plans rather than risk missing the boat. If a lot of organisations gear up to make offers at the same time, some may run into capacity constraints when they come to select independent financial advisers to help members understand their options. Banning transfers to UK DC schemes while retaining the ability to transfer to overseas DC arrangements would have been odd. The final policy looks much better.

“People should think very carefully before moving their pension out of a defined benefit scheme where a former employer underwrites risks such as those relating to investment and longevity.

“However, this can be an attractive option for some who want more flexibility about how and when to take their benefits – especially if they are in poor health and could take advantage of impaired annuity rates – or who can afford to take risks with their investments in pursuit of better returns.”

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