The subject that has probably received the most vehement reaction from advisers – and attention from regulators – since the pension freedoms were announced, is transfers. In particular the focus has fallen on transfers from defined benefit schemes, which are essentially excluded from the new freedoms.
According to Xafinity’s new transfer index, a 65-year old with a £10,000 inflation-linked benefit would currently achieve a transfer value of between £185,000 and £215,000.
To ensure people are not blinded by pound signs and the numbers do not eclipse a more considered review of the value of guarantees, the FCA published draft rules in March detailing advice requirements for transfers.
Advice will be mandatory for all transfers from defined benefit schemes to defined contribution schemes. This includes transfers to trust-based schemes, which are regulated by the Pensions Regulator. Advice that is fully authorised under FCA rules will be required in all cases.
In fact, the regulator says all transfers from a ‘secure’ benefits environment – including for example, money purchase schemes with a guaranteed annuity rate attached – will require advice to be taken.
This will include conversions from secure to ‘flexible’ benefits within a scheme, although the FCA said this is rare and will apply more to hybrid ‘defined ambition’ schemes that are not yet available.
Transfers from an occupational DC scheme to a contract-based personal pension scheme will also need to be advised.
There is only one exception. DB savers moving a pot with a transfer value of less than £30,000 will be assessed on a per pot basis, so larger sums in total savings value could be covered.
In most cases advice will need to involve a formal ‘transfer value analysis’ report to be produced to ensure the client is fully aware of the relative value of benefits being forfeited.
Most processes will also need to be undertaken – or at least overseen – by a designated ‘pension transfer specialist’. A specialist is an adviser who has obtained specific regulatory permissions and holds either the G60 or AF3 qualification from the Chartered Insurance Institute (CII), a ‘pensions paper of professional investment’ certificate through the IFS, or who is a fellow or associate of the Pensions Management Institute or Faculty of Actuaries.
Citing capacity issues the FCA said it had excluded from this specialist oversight transfers from DC schemes with guaranteed annuity rates, which can still be handled by any RDR-authorised adviser.
The FCA estimates there are around 7,000 advisers with relevant permissions and that DB to DC transfers alone could increase advice demand from around 20,000 to 35,000 cases each year.
In truth, most advice processes will culminate in a recommendation not to transfer.
For the majority of savers, the value of their fund may look like a lot when expressed as a lump sum, but will generate significantly less income in the money purchase world. Take for example the £10,000 inflation-linked income for the 65-year old cited by Xafinity earlier. The lump sum transfer this would generate would, if converted into an inflation-linked annuity, produce between £6,700 and £7,700 through Hargreaves Lansdown’s best buy panel.
Tax issues
If savers are transferring to take the lump sum there is the issue of tax. If the saver triggers the higher or additional tax rate, they will be stuck on this rate for the rest of the year.
Savers are also going to be hit with emergency taxes upfront in many cases, meaning someone taking more than £12,500 – or less if they have other income – could trigger a 45 per cent charge that they would need to claim back later.
Other issues include simple investment risk: in a DB environment the benefit is guaranteed, but in a DC fund it is subject to market volatility.
Lifetime allowance protections could also be revoked if the currently higher enhanced transfer values are deemed to constitute further benefit accrual by the taxman.
Where this is the case, a hefty 55 per cent tax would apply on the amount considered to be in excess of the new lower £1m lifetime allowance applying from next year.
So will it ever be good advice to recommend a transfer? The answer is probably rarely, but never say never. For example, if money is used to pay down expensive debt it could produce a disproportionate net benefit for the member and improve their financial comfort.
Small pots are also a different kettle of fish. The benefit that can be secured with pots of less than, say, £10,000 is seldom worthwhile and can arguably be put to better use as a lump sum.
Of course, transfers or withdrawals of such pots do not need to be advised and most would be covered by trivial commutation rules.
Advisers will generally remain staunchly opposed to most transfers. Remember, though while people have to take advice, they do not have to follow it.
Insistent clients
All of which brings us to the issue of ‘insistent’ clients, which made headlines in the weeks leading up to 6 April.
Advisers are concerned that, if they advise against a transfer – or any other course of action – and the client goes ahead anyway, helping them could mean they are liable to face claims in the future.
Whether these fears are founded cannot be known, but under its basic principles the Financial Ombudsman Service (Fos) does not have to find in an adviser’s favour just because they complied with FCA rules.
Personal Finance Society (PFS) chief executive Keith Richards has suggested advisers should ‘just say no’ to clients that do not wish to follow advice, in a move backed by others including Simplybiz and Tenet.
The FCA’s Maggie Craig previously told an FTAdviser audience that, whether or not advisers choose to walk away from clients should be a ‘case-by-case judgement’.
