The high proportion of pension transfers goes against the regulator’s stance that transfers are unsuitable for most.
Seven in 10 defined benefit (DB) or final salary transfer requests are approved by financial advisers, a finding that has drawn strong criticism from the Financial Conduct Authority (FCA).
The FCA said it finds the high proportion of consumers being given the green light to transfer out of the salary-based schemes – which typically offer an index-linked income for life, plus benefits (see below) – as “deeply concerned and disappointing”.
It found that 234,951 individuals had received advice on transferring. Of those, 162,047, equating to 69%, had been recommended to transfer out and 72,904 (31%) had been recommended not to transfer.
During some of the period examined – April 2015 to September 2018 – transfer values rose to record highs. This is due to transfer values fluctuating in line with gilt yields, with the latter being at historically low levels.
The high proportion of pension transfers goes against the regulator’s stance that transfers are unsuitable for most. The average pension transfer figure stood at £352,303.
As a result, the FCA has vowed to step up its crackdown on final salary pension transfers, building on work it carried out 20 months ago when rules were tightened.
The new rules it previously introduced included beefing up the qualifications required to undertake pension transfer advice. In addition, advisers were required to produced more comprehensive risk assessment reports when assessing whether a transfer is suitable or not.
But, despite tightening the rules, the FCA conceded that “too much advice is still not of an acceptable standard”. Therefore, it will be visiting firms, a process it says has already started, and will be closely assessing whether the advice given is suitable. It will begin by visiting the most active advisory firms that facilitate pension transfers.
Megan Butler, executive director of supervision, wholesale and specialists at the FCA says: “We have said repeatedly that, when advising on DB transfers, advisers should start from the position that a transfer is not suitable. It is deeply concerning and disappointing to see that transfers are still being recommended at the levels we have seen.
“Deciding whether to transfer out of a DB scheme is one of the most complex financial decision a consumer may have to make, and it is vital customers get high quality advice. Our ambition is for pension transfer advice to reach the same standard as that of the rest of the financial advice market.”
The rise in final salary or DB transfers has been labelled by some, including the Work and Pensions Committee, as a “major mis-selling scandal”. It has previously called on the FCA to ban contingent charging – where advisers only receive payment when transfers go ahead – which it sees as a ‘key driver’ of poor advice.
But, when the FCA tightened the rules, it stopped short of introducing a ban on this practice.
While the FCA’s stance is a sensible one – that the default position should be that a transfer is probably not in a person’s best interest – there are reasons when a strong case can be made to consider a transfer. Below we run through the pros and cons.
Why you shouldn’t cash out
The first point to make is that there’s a good reason why final salary or DB pensions are looked upon with envy by those in defined contribution pensions. Final salary schemes were rolled out by employers during the 1960s, 70s and 80s, offering workers a guaranteed income for life when they retired.
The amount has historically been based on a percentage of a worker’s final salary multiplied by the number of years they have been in the scheme, though more recently schemes have been modified to base payouts on a less generous ‘career average’ salary.
As well as typically being inflation-proofed, most schemes also offer a continuing spousal income, usually 50%, upon the death of the pension holder.
However, final salary schemes became increasingly unaffordable for employers, for a number of reasons including increasing levels of life expectancy. Nowadays, except in the public sector, the vast majority of those entering the UK workforce will find themselves paying into defined contribution pensions whose fortunes are linked to underlying investment performance.
For many final salary pension holders, particularly those who do not have other resources to rely on in retirement, the benefits are essential and should not be given up.
Those who are not confident in investing, or who do not want to seek out a reputable financial adviser or wealth manager, should also steer clear of cashing in. By switching your final salary pension to a defined contribution scheme you will be putting your pension pot at the mercy of the stockmarket.
Reasons to consider a transfer
One of the main attractions behind transferring is that defined contribution pension schemes offer individuals greater flexibility in leaving a legacy.
In the case of defined benefit schemes, the benefits stop when your spouse dies. If you both die early, it is simply a case of tough luck. Moreover, if you are widowed or divorced the pension will end on your death, with no benefits paid to children or grandchildren.
With defined contribution pension schemes, in contrast, the pension pot can be passed to whomever you wish. Transferring for this purpose should only be considered by those who are in a ‘comfortable’ financial position, with other assets to draw on for their retirement income, such as Isas or Sipps.
Another reason to transfer is if the guarantees in the final salary scheme are less relevant to you, for example if you are in ill health.
Either way, financial advice is crucial; the government insists that people with over £30,000 at stake take independent financial advice to understand the guarantees they’re giving up.