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Comment on FCA consultation on final salary transfers

Andrew Tully, pensions technical director, Retirement Advantage
The attractions are obvious, but there are pitfalls for the unwary.
Andrew Tully, pensions technical director, Retirement Advantage

The FCA today issued a consultation paper looking at final salary transfers. The proposals aim to reflect the increased demand for pension transfer advice since the introduction of the pension freedoms in April 2015.

The proposals include:

  • to remove the existing guidance that an adviser should start from the assumption that a transfer will be unsuitable
  • 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 the client’s circumstances and provides a recommended course of action
  • updating FCA 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

FCA also want views on other areas including the –

  • qualification and experience requirements for a pension transfer specialist
  • different models used for meeting the requirement for advice to be given or checked by a pension transfer specialist
  • use of models of stochastic modelling when advising on transfers
  • relationships between advisers and providers where providers make software available for advisers to use
  • current assumptions for revaluation and indexation used in analysing DB benefits

The consultation closes on 21 September 2017. Full paper here >

Andrew Tully, pensions technical director, Retirement Advantage commented:

‘Driven by record transfer values, and the opportunities presented by pension freedom, there are a huge number of people looking to transfer out of final salary pensions. The attractions are obvious, but there are pitfalls for the unwary.

‘Due to low gilt yields, many transfer values look very attractive at the moment, often with values above 30 times income, well above historic averages. Combined with the extra flexibility offered by the pension freedoms, it is no surprise people are consider moving out of a final salary schemes into drawdown or a combination of drawdown and annuity. This has been an unintended consequence of the pension freedoms, and although clearly not right for everyone, can lead to better outcomes for some people.

‘There is a risk people will be driven to transfer because of the ‘snowball effect’ caused by hearing about or knowing many others who are transferring. It’s clearly important each case is judged on its own merits. But neither should people be criticised for trying to get the best outcome for their family.

‘The ability to pass unused pension wealth to family is a strong driver for many people, especially when contrasted with the often poor level of death benefits available to those who have a final salary benefit with a previous employer. Similarly, those who are single, widowed or divorced may benefit from the ability to re-shape death benefits to suit their individual circumstances.

‘Final salary schemes lack flexibility, so a transfer can allow advisers to help customers control the amount of tax they pay, and gradually ease their way into retirement. When combined with the potential for greater amounts of tax-free cash and possible health issues, there are a range of reasons why a transfer may be worth exploring.

‘However, it is important to recognise many people are likely to be better off staying put, despite the obvious attractions which pension freedom offers. A guaranteed lifetime income shouldn’t be snubbed without careful consideration. Although it’s worth remembering alternatives – such as hybrid drawdown contracts - can help customers mitigate risks after transfer

‘The need for advice in this area is clear. Many people are looking for help, and there is a danger that demand is greater than the supply of advisers able and willing to get involved. So it is important the regulatory regime doesn’t discourage advisers from helping clients who want to investigate a transfer.’