FSA has taken ‘wrong stance’ on pension transfers, advisers
Regulator is stating the obvious instead of approaching more serious problems, says one IFA.
New guidelines from the Financial Services Authority on pension transfers, which state broadly that most transfers are ‘inappropriate’, represent the “wrong stance” from the regulator and will fail to deal with the bigger issues in relation to this issue, according to several advisers.
Anna Sofat, director of adviser firm Addidi Wealth, said that the FSA should not apply such a “blanket approach” and stated that her concern is not for those who transfer out of DB schemes so much as for those who subsequently remain.
Ms Sofat said: “You will have individuals who know what they are doing and want to transfer out, so the FSA can’t take a blanket approach. What is a bigger issue is if what they are transferring out is fair value - not just for them but for the rest of the scheme members.
“If you have got five grand a year or something, I don’t think there would be many transfers at that level. Most have been far bigger clients and they tend to be senior executives and there are reasons they want to transfer.
“If you have a smaller number of people with high value transferring out it could leave the rest of the scheme at a disadvantage later on.
“You have got actuarial firms that also have IFA firms. There is supposed to be a watershed between the two sides but I don’t know how solid that wall is.”
According to Carl Melvin, managing director of Pension Transfer Solutions, there are three main reasons why someone would want to transfer their pension.
He said that first of all they might have concerns about the scheme’s solvency, saying: “If you are a high earner and that pension scheme goes bust you may not be entitled to all the pension you would have otherwise received.”
Second, final salary pension schemes assume that everyone gets the same benefits based on the years of service in the scheme.
Mr Melvin said this means that if someone is in poor health, for example, they will likely be paying more for less if they don’t live as long as healthy retirees. Pensions that pass on to the member’s widow is another example of this, he said.
The final, riskiest motivation to transfer ones pension, according to Mr Melvin, is to unlock one’s pension savings to pay down present-day debt.
He said: “There are very few occasions when you should transfer a defined benefit scheme, but there are some reasons you would do it. It isn’t necessarily that you shouldn’t do it, but advisers should make clear the risks of doing it.”
Both Mr Melvin and Ms Sofat said the FSA was “stating the obvious” in reference to the FSA’s recent announcement.
Carl Lamb, director of Almary Green Investments, added: “For them to say most transfers are inappropriate isn’t the right stance to take.
“I come across examples where quite clearly it shouldn’t have happened but it’s a very wide statement to make without providing additional evidence for people to look at.”