HOT OFF THE PRESS
Your pension is a vital part of your financial future, especially if you are considering transferring from a defined benefit to defined contribution scheme.
It’s fair to say that, as Defined Benefit (DB) pensions and other safeguarded benefits generally provide a guaranteed pension income, most consumers will be well advised to stay put.
But with the ever-changing pensions environment, bought about through the introduction of the pension freedoms, that provide more options to access you pension savings, there is an growing demand to access pension savings.
As a result of this desire to access pensions, earlier this month the Financial Conduct Authority (FCA) issued new rules and guides regarding how advice should be provided to you on pension transfers. These are designed to make sure that advisers fully consider the client’s circumstances and properly consider the various options, where clients may be considering giving-up safeguarded benefits.
Although these guidelines are aimed at firms advising on pension transfers and those advisers acting as pension transfer specialists, I always feel that clients should know just what great advisers are aiming to achieve. As it helps you distinguish between a good adviser and a great adviser.
So what does great advice look like?
Apart from the obvious increase in the rigor around qualifications needs by advisers to provide advice in the pensions transfer marketplace, the FCA has also provided best practice guidelines for providing advice.
Quite rightly the FCA maintain that any adviser should start from the assumption that any form of pension transfer will be unsuitable for their client. This starting point has come from the high proportions of unsuitable advice the FCA have seen in supervisory work.
This assumption that a transfer is unsuitable is actually a smart position to take, as it means that the adviser then has to demonstrate why a pension transfer is the right thing for their client.
The FCA go on to highlight a need for better consideration regarding how pension transfers should be paid for by clients.
With this in mind, the new rules and guidance will include the following:
- All advice on pension transfers must be personally recommended by the adviser
- There should be a greater clarification of the role of the Pension Transfer Specialist (PTS) when checking advice being provided
- Greater analysis to support the advice being given – The FCA aim to replace the current Transfer Value Analysis (TVAS) requirement with a new requirement to undertake an ‘appropriate pension transfer analysis’ (APTA) of a client’s options. There should also be a prescribed Transfer Value Comparator (TVC) that indicates the value of the benefits being waivered, along with the true cost of purchasing the same income in a defined contribution environment
- There should be a consistent approach applied to pension opt-outs where there are any potential safeguarded benefits
- The adviser should consider the proposed destination of the transferred funds, including both the proposed scheme as well as the investments being proposed within that scheme. This review should take into account the client’s attitude to transfer risk, as well as their attitude to investment risk
This also means that where a firm/adviser is assessing the client’s attitude and understanding of the risks involved in giving-up safeguarded benefits in exchange for flexible benefits, then they should consider the following:
- the benefits and the risks for staying in the original safeguarded scheme
- the benefits and the risks of transferring out to a flexible benefits scheme
- the attitude of the client regarding certainty of income throughout retirement
- if the client is likely to want unplanned access to the funds and the associated impact of that on the funds long-term sustainability
- the client’s attitude to any restricted access of their funds in a safeguarded benefits scheme
- their client’s attitude to managing investments themselves, or to paying for them to be managed in a flexible benefit scheme.
Knowledge is power – and we’re here to help answer your questions
All I ever aim for in my blogs is to share knowledge with you, give you the heads up on important changes coming your way. If you are considering a pension transfer, then there is nothing more important on the immediate and predictable horizon than these changes.
They are being introduced right now to protect you and your investments and by reading through the proposed changes I hope that it has given you a greater understanding of pension transfers, as well as better enabling you to make the right decisions regarding your own circumstances.