Savers MUST get better help on final salary pensions, says FCA

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Pension dilemma: More than six million people are eligible to transfer out of final salary schemes, says the FCA


Watchdogs have told financial advisers to improve the help they offer savers wanting to give up valuable final salary pensions after uncovering widespread failings.

Rising numbers of people are abandoning guaranteed and typically generous final salary pensions after being offered gigantic sums – often worth vastly more than the current size of their pots – by employers keen to clear expensive obligations off their books. 

New rules for advisers include giving people a better heads-up about the pros and cons right at the outset, carrying out a fuller assessment of clients’ attitudes to risk, and holding an investment as well as a pension qualification.

But a decision over ‘no transfer, no fee’ offers to savers, which critics say cause conflicts of interest, was postponed. 

Pension dilemma: More than six million people are eligible to transfer out of final salary schemes, says the FCA

Pension dilemma: More than six million people are eligible to transfer out of final salary schemes, says the FCA

A probe by watchdogs last year found fewer than half of people giving up a final salary pension get a suitable recommendation or subsequent pension product. 

Regulators uncovered a series of failings by financial advisers and pension transfer specialists, which at worst could be leaving savers at risk of moving pensions to scam schemes.

In a later scandal where British Steel pensioners were targeted by vulture advisers, the FCA ending up forcing 18 firms to stop providing pension transfer advice. 

Savers must pay for financial advice before moving a final salary pension worth £30,000-plus, so the watchdog is trying to improve rules on the help people are given before making a crucial decision they can’t take back.

Today, it announced that advisers should:

– Explore clients’ attitudes to the general risks associated with a transfer, in addition to their attitude to investment risks

– Carry out an appropriate ‘triage’ service – an initial conversation with potential customers – without stepping across the advice boundary, by providing generic, balanced information on the merits of pension transfers

– Get an investment qualification in addition to a pension transfer specialist qualification by October 2020

– Provide a suitability report on a pension transfer regardless of whether they recommend one to a customer or not

Seven questions to ask if you are tempted to move a final salary pension 

Want to know how to spot red flags BEFORE you fork out for financial advice. Pension firm Aegon has devised a traffic light system – read more here.

– Update how they value inflation-linked increases in final salary pension payouts.

‘No transfer, no fee’ offers by financial advisers, known in industry jargon as ‘contingent charging’, will be investigated further by the FCA, which is worried a ban might reduce the availablity of advice.

It also says the evidence it has seen does not show such deals are the main driver of poor outcomes for customers.

But this was attacked by influential MP Frank Field, chair of the work and pensions committee, who said: ‘Pensioners were swindled out of their savings yesterday, are being swindled out of those funds today, and still will be tomorrow. 

‘Yet the FCA fails to take effective action. Having seen the fate that befell British Steel pensioners, the Committee called on the FCA to take urgent action to ban contingent charging. 

‘Instead, the FCA has buried this in the long grass, even as unscrupulous advisers are circling like vultures around consumers. It’s time the FCA took decisive action to prevent another misselling scandal.’

Christopher Woolard, the FCA’s executive director of strategy and competition, said: ‘These new rules will mean advisers have greater certainty and confidence in what we expect when they offer pension transfer advice.

‘We expect our interventions to improve the quality of advice which will help to reduce the number of complaints against advisory firms. We will measure consumer outcomes through our supervisory work.’

‘Any changes to our rules on contingent charging could have implications for the supply of advice. 

‘Because of the significance of this issue to all stakeholders in the market, we will carry out further analysis and consult on new interventions if appropriate in the first half of next year.’ 

Why are people giving up final salary pensions?

Final salary or ‘defined benefit’ pensions are typically generous and provide a guaranteed income for life.

But increasing number of people are tempted to give them up for a range of reasons – the huge offers they receive from employers, the desire to invest their savings in the hope they will continue to grow, and the opportunity to leave whatever is left over to loved ones when they die. 

Meanwhile, pension freedoms launched in 2015 give people in ‘defined contribution’ schemes, where they and employers contribute to a pot that’s invested for retirement, the power to do what they want with their savings once they reach the age of 55.

Those still saving into final salary pensions cannot take advantage of these freedoms unless they transfer to a defined contribution scheme, but they have to get financial advice if their pot is worth £30,000-plus.

However, leaving a final salary pension scheme means people must bear all the investment risks to their retirement pot going forward. 

What does the pension industry say?

Jon Greer, head of retirement policy at Quilter, said: ‘Anyone considering a pension transfer needs a full understanding of the responsibilities they will be taking on.

‘In particular it means managing the pension investments on an ongoing basis will be your responsibility, as will bearing all the investment risk through the ups and downs of financial markets.

‘That job would continue during your retirement years, unless you purchased guaranteed income via an annuity, which could prove expensive compared with the guaranteed income from your defined benefit pension.’

He goes on: ‘Transferring away from a defined benefit or ‘final salary’ pension is a decision that could have huge repercussions in terms of your future lifestyle, particularly when you are very elderly.

How many people are ditching final salary pensions? 

More than six million people are eligible to transfer out of final salary schemes, says the FCA.

Transfer values have been at record high levels since 2016, with the industry reporting the average size of transfer at over £250,000.

The FCA estimates that 100,000 members are moving benefits worth £20-30billion out of final salary schemes every year.

‘Therefore it is vital to seek professional financial advice. 

‘The decision not to transfer is often the right one, but financial advisers can face scrutiny long after the advice is given even when recommending not to transfer if someone could have got a high transfer value at that time.

‘Today’s package of changes announced by the FCA are sensible, measured and should give consumers increased confidence in any advice they receive in this area, as well as clearly laying out what is expected of advisers, who must focus rigorously on the suitability of their advice whether the advice is to transfer or to stay put and keep comprehensive records.’

Andrew Tully, pensions technical director at Canada Life, said: ‘Pension transfers have probably been the biggest, and perhaps most unexpected, trend emerging from pension freedoms.

‘This behaviour has largely been driven by record high transfer values and people looking to tailor benefits that better suit personal circumstances. 

‘But it has also been driven by employers looking to re-structure their final salary schemes or close them altogether.

‘By transferring a final salary pension someone is giving up very valuable guarantees which mean these decisions should never be rushed or taken lightly or without the protection of proper regulated financial advice.

‘However transfer values continue to look attractive in many cases. 

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‘The ability to use the pension freedoms to create a financial plan which works for both the customer and their dependents has strong appeal, especially when you compare the flexibility of combining drawdown and guarantees from annuity, with a traditional final salary pension.

‘Despite some recent very poor practices in the market which have rightly been called out, I remain of the view that transferring a final salary pension can work to the customers’ advantage in some circumstances, but for the majority retaining the final salary membership will continue to be the best course of action.’

Steven Cameron, pensions director at Aegon, said: ‘We’re particularly disappointed that the FCA guidance on a triage service continues to focus on what advisers ‘can’t do’ within a pre-advice conversation.

‘We’d hoped for a more ‘can do’ focus under which advisers would be clear on how they could discuss which personal circumstances make a transfer more or less likely to be suitable without this being ‘advice’.

‘Advising on DB transfers is a complex and costly process and an effective form of triage would be hugely beneficial, stopping customers who shouldn’t transfer from incurring significant advice charges.

‘It would also help advisers focus their limited resources on clients most likely to benefit from transferring. This is crucial as demand for advice far exceeds supply.’

Nathan Long, senior analyst at Hargreaves Lansdown, said: ‘These final rules are incredibly important as it’s crucial that advice in this very complex area is of the highest quality, especially given the regulator’s starting assumption that giving up a defined benefit pension is generally not in members’ best interests.

‘The regulator continues to allow advisers to charge fees only in the event of transferring, yet has looked to clamp down on quite how extensive pre-advice conversations on the pros and cons of a transfer can go.

‘An unintended consequence could mean more people being attracted to advisers using a contingent charging model.’

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