The Financial Conduct Authority (FCA) is banning the use of ‘no transfer, no fee’ charging models for pension transfer advice from October.
It comes after the regulator found cases of people being advised to transfer out of valuable defined benefit (DB) or ‘final salary’ pension schemes into a defined contribution (DC) scheme, despite it not being in their best interests.
The FCA has recognised that advisers could be offering poor advice in order to get paid and has announced it will ban the controversial advice model from 1 October.
Read on to find out more details on why the FCA decided to take this action, what to do if you think you’ve been given bad pension transfer advice and whether leaving a DB scheme is ever a good idea.
What is a DB to DC pension transfer?
A defined benefit (DB) pension (or ‘final salary’ pension) is a type of pension that promises to pay out an income based on how much you earn when you retire.
Unlike defined contribution (DC) pensions, the amount you’ll get at retirement is guaranteed, and it will be paid directly to you – you won’t have to use your pension pot to decide your next move.
The pension freedoms which were introduced in 2015 to give people total flexibility over their pensions, which includes transferring out of their defined benefit (DB) or ‘final salary’ pension into a DC scheme.
However, under current rules, those with more than £30,000 in pension savings must seek financial advice before transferring out. This has brought in a lot of potential business for advice firms.
- Find out more: what is a final salary pension?
Why is the FCA banning free DB transfer advice?
The FCA says that given the advantages of DB schemes, the proportion of consumers that advisers have advised to transfer to DC schemes remains ‘too high’.
This is because of an advice model called ‘contingent charging’, in which advisers are only paid by the customer if they go ahead with the transfer.
While this means consumers effectively have access to ‘free advice’, if a transfer goes ahead it could end up costing members tens of thousands of pounds, only to be put in a much less generous DC scheme.
According to its latest data, some 69% of consumers have been found to be advised to transfer their DB pension, despite being better off in their DB scheme.
What the FCA ban means for you
Many advisers have been charging 4 to 5% of the transfer value, which equates to £17,615 for the average transfer of £352,303, according to the regulator’s most recent data.
It has estimated the ban could save consumers £1.4bn a year in a best-case scenario.
However, this means from 1 October you’ll be required to pay for pensions advice upfront, although there are some exceptions.
The ban applies to all apart from specific groups, such as those in financial hardship (such as losing your home), people with serious health conditions or those who may have a shortened life expectancy.
- Find out more: how to find a financial adviser
How to check if you’ve received bad pension transfer advice
Financial advisers are meant to provide guidance and recommendations on complex financial products, including pensions.
However, the FCA says that it recognises consumers may have concerns about the advice they have received. In response, it’s produced an ‘advice checker‘ which will set out what advice they should have received.
If you’ve received poor DB transfer advice and the company that advised you is no longer in business, you can submit a claim to the Financial Services Compensation Scheme (FSCS). The FSCS may be able to compensate you up to £85,000 if it determines you have suffered a financial loss as a result of the poor advice you received.
As part of its major review into the transfer market, the FCA has also launched 30 enforcement investigations into firms that have given poor transfer advice to customers.
- Find out more: FSCS explained
Should you transfer out of your DB pension scheme?
The ability to transfer out of your pension has transformed the retirement plans of thousands of people to give them access to their retirement savings. But there are pros and cons, which we have outlined below.
The Pensions Regulator (TPR) and the FCA believe that it will be in the best interests of members to keep their DB pension.
According to the FCA, you may be less suited to a pension transfer if:
- This is your main or only pension
- You’ll rely on income for this pension throughout retirement
- Your DB pension meets your needs, so you don’t need to take investment risk
- You have dependents who might prefer some of the DB pension features, such as a guaranteed income rather than a lump sum.
While the flexibility of a DC plan may be appealing so you can have control over your money, you’ll likely be taking a lower income. Also, not all employer pension schemes, personal pensions or self-invested personal pensions (Sipps) accept transfers, so make sure to check first.
- Find out more: what you need to know about final salary pension transfers
How to transfer your DB pension
If you decide to transfer, you must first request a ‘statement of entitlement’ from your scheme to check if you can transfer.
You’ll then need to get regulated financial advice for any pot worth more than £30,000.
After this, your pension scheme will confirm the ‘transfer value’ (the fixed cash value of your DB pension) and send the paperwork.
This won’t be in the form of cash, but it can be invested in a pension pot (personal, workplace or Sipp) from which you can then draw an income from the age of 55, which includes a 25% tax-free lump sum. To get a guaranteed, inflation-linked income with a DC pension, you can also buy an annuity.
You’ll have six months from the start of the process to confirm you want to transfer your pension and provide proof you’ve taken financial advice.
The deadline for your pension scheme trustee to complete the transfer is nine months.
If you’re considering transferring, you might face a delay. TPR has given pension fund trustees free rein to suspend transfer activity for three months starting 27 March due to the current coronavirus crisis. According to pensions advisory firm Isio, more than a quarter of pension fund trustees have taken advantage of this.
- Find out more: should I take a lump sum from my pension?
Beware of pension transfer scams
Unfortunately, the pension freedoms have given fraudsters the opportunity to fleece millions of people out of money with sophisticated scams.
Last year, TPR and the FCA found two fifths of people aged between 45 and 65 are at risk of falling victim to pension scams.
If you think you’ve been scammed, or been contacted by scammers, call Action Fraud on 0300 123 2040 to report it.
For advice on your pension, read our detailed guides:
And before you agree to anything, call The Pensions Advisory Service on 0300 123 1047 for more guidance and information.
- Find out more: how to spot a pension scam