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New rules to prevent ‘irrational’ pension transfers

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The Financial Conduct Authority (FCA) has announced it will introduce rules to prevent it being inundated with ‘irrational’ transfers from final salary pensions to stock market-linked schemes, by retirees who want access to the lump sum granted by the new pension freedoms.

The reforms to the UK pension regime only apply to those with defined contributions (DC); those with defined benefit (DB) schemes wishing to take advantage must transfer their pension funds to a DC scheme.

The FCA has now said it will compel retirees considering moving from a DB to a DC to seek specialist pension advice before doing so; the regulator is concerned that thousands could be preparing to switch when it is not in their interest to do so.

The FCA estimates that up to 6,000 people could make an ‘irrational’ decision to switch every year from now on, while 9,000 would make a ‘rational’ choice to move to a DC scheme.

A switch is deemed ‘rational’ if the desire for full access to a pension is to pay off debts, or capitalise on investment opportunities.

Previously, the FCA regulated advice on transfers to personal pensions, not on transfers from DB to DC schemes. However, the regulator will now require that any advice on the latter must be sourced from someone qualified in pension transfers.

‘We need to ensure that those who are considering moving away to other arrangements are fully aware of the potential benefits they are giving up,’ said Christopher Woolard, director of strategy and competition at the FCA. ‘Ensuring independent advice is taken is an important protection.’

The FCA’s proposals have generally been greeted positively by the pensions industry. Tom McPhail of of Hargreaves Lansdown said the government had imposed “an extremely rushed timetable” on the pension reforms, meaning “the industry and the watchdog are having to think of things quite late in the day.”

The FCA said the new rules would be implemented in June.

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