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New measures to protect savers thinking about ditching their final salary pensions
A controversial charging model which means advisers are only paid for recommending savers give up their valuable final salary pensions is set to be banned under measures proposed by the regulator.
The Financial Conduct Authority (FCA) said the ban on ‘contingent charging’ would protect customers from conflicts of interest which arise when a financial adviser only gets paid if a final salary or defined benefit pension transfer goes ahead.
The FCA said it was ‘deeply concerned’ by the number of savers who are told by advisers to ditch their ‘gold plated’ final salary pensions – also known as defined benefit pensions.
Pension freedom rules have led to an increase in people considering switching from one to the other.
However, in most cases, it’s not in the best interests of savers to transfer their defined benefit pension to a defined contribution pension.
The ban would not apply in circumstances where a transfer out would clearly be in a saver’s best interests – for example, when someone is seriously ill or facing severe financial hardship.
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The FCA is also proposing a new type of abridged advice or ‘advice light’ service, which would be low cost and filter out people who don’t have a realistic chance of a transfer being suitable.
Nathan Long, senior analyst at Hargreaves Lansdown, said: “It’s rare that transferring a defined benefit pension is the best course of action, so banning contingent charging for this type of advice seems sensible.
“The challenge will be in making sure those for whom it could make sense have access to advice. This type of specialist advice is very complex and tends not to be cheap, which is why the FCA are considering an advice-light service to help people understand if even taking further advice would be worthwhile.”
Tom Selby, senior analyst at investment firm AJ Bell, said: “More than four years after the pension freedoms were introduced and under mounting political pressure, the FCA has finally decided ‘enough is enough’ on contingent charging for defined benefit pension transfers.
“It has been clear for some time that the regulator is uncomfortable with both the volume of transfer activity and the quality of the advice being given in certain circumstances.
“It’s important to note that while the FCA remains concerned about DB transfers as a whole, there are circumstances when it is in a client’s best interests to give up their guaranteed pension in favour of the flexibility and death benefits available through defined contribution schemes. Ensuring these people can access good quality advice is vitally important.”