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Watchdog proposes changes to final salary pension transfers

Written by: Paloma Kubiak
The Financial Conduct Authority has proposed tougher advice measures be adopted by firms to help consumers considering transferring from a Defined Benefit to a Defined Contribution pension.

Holders of defined benefit(DB) or final salary schemes are increasingly transferring out at retirement. A survey of more than 800 financial advisers by mutual insurer Royal London, found a 50% rise in the volume of transfers out of final salary pensions taking place in the last year, with the most common transfer value between £250,000 and £500,000.

See’s The case for and against transferring out of your final salary pension for more information.

The Financial Conduct Authority (FCA) has today published proposals aiming to ensure consumers receive appropriate guidance when making the decision of whether to transfer. These include:

  • replacing the current transfer value analysis requirement (TVA) with a comparison showing the value of the benefits being given up
  • introducing a rule to require all advice in this area to be provided as a personal recommendation, which fully reflects consumers’ circumstances and provides a recommended course of action
  • updating its own guidance on assessing suitability when giving a personal recommendation to convert or transfer safeguarded benefits, so that advisers focus on whether a transaction is right for a particular individual
  • introducing guidance on the role of a pension transfer specialist.

‘Information from administrators can be misleading’

Nathan Long, senior pension analyst at Hargreaves Lansdown, said the steps should improve the relevance and personalisation of the transfer advice process: “Put simply, a defined benefit pension scheme is an annuity but at a bargain price. For most retirees a secure income is a fundamental necessity, so the default must be that you are better off keeping a defined benefit pension. In certain circumstances a transfer can make sense, but the pension must be viewed in light of a person’s overall finances rather than in isolation. Forcing schemes to allow people to transfer only part of their pension ensures the rigidity of defined benefit pensions can be adapted to cater for modern working patterns among older workers.

He says that information from administrators can be misleading, confusing or just plain wrong: “With this backdrop it is imperative that robust protections are in place to ensure quality advice from experienced advisers is provided when transferring a defined benefit pension. The proposals put a greater emphasis on suitability, rely less on mechanistic analysis and ensure advisers challenge unrealistic expectations which is great for ensuring we get the best outcome for pension savers, but does little to reduce the cost of advice in transferring such a scheme. It also sets out that transferring such a scheme requires a personal recommendation, leaving any thoughts of a half-way house guidance service dead in the water.”

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