Restrictive pension transfer rules post-freedoms have meant a client in ill-health has lost out on a favourable annuity rate after a request to transfer could not be processed in time.
Julian Pruggmayer, sole trader at Financial Risk Management, applied in May on behalf of his client for a transfer of an old defined benefits (DB) scheme, which had no guaranteed annuity rate attached to it.
The client, Tony Potts, who is in his late 60s and has type two diabetes and high blood pressure, had been with the London International Group scheme for just two to three years in the mid 1980s.
Because of his recent ill health, Mr Potts asked Mr Pruggmayer whether he could transfer this old pension of £42,000 into his existing pension, with a view to taking out an impaired lives annuity.
The rules are there for a reason but there has to be some allowances made for the client’s best interests, particularly someone as ill as my client Julian Pruggmayer
However, by July, the transfer had not gone through, so Mr Pruggmayer chased it up - only to be told Mercer could not transfer the pension without further documentation.
Mercer cited the rules under pension freedoms, whereby an adviser who is not registered as a pension transfer specialist as an AF3 cannot do DB to defined contribution (DC) pension transfers.
The pension transfer value was more than the £30,000 maximum limit set out by the Pension Schemes Act 2015 and the FCA for transfers without a pension transfer specialist.
But Mr Pruggmayer said he had the advice and recommendation checked by an authorised pension transfer specialist, Chequers Wealth Management, and he said he had informed Mercers of this by letter.
He said he also spoke to the Financial Conduct Authority’s call centre twice, who, Mr Pruggmayer claimed, said the transfer should be able to go ahead under the rules set out in its policy statement 15/12.
This would make allowance for Mr Pruggmayer getting the recommendation checked, as well as the lack of safeguarded benefits on the old DB scheme.
Before the pensions freedoms regime came into force, a client such as Mr Potts, in ill-health and with a relatively small DB pot, could have been transferred without the need to get a second advisory firm involved.
Post-freedoms, the FCA requires advisers carrying out pension transfers to have a specialist qualification, or at the least, to get this checked - which adds to the administrative burden on advisers and trustees.
Cobs 19.1.1 states: “If an individual who is not a pension transfer specialist gives advice or a personal recommendation about a pension transfer, a pension conversion, or pension opt-out on a firm’s behalf, the firm must ensure the recommendation or advice is checked by a pension transfer specialist.”
In an email dated 17 August, Mercer told Mr Pruggmayer: “We received confirmation from the policy to which Mr Potts intended to transfer that it is a flexible benefit arrangement as defined in the Pension Schemes Act 2015.
“As such, there is a requirement for the member to receive advice from an adviser that is appropriately authorised by the FCA,” the message read.
“As the FCA register indicates that Financial Risk Management are not currently registered for such activity, the trustees are unable able to proceed with this transfer.”
Mr Pruggmayer said he informed Mercer he had got the advice checked. However, the restrictive nature of the new pension transfer rules meant more documentation was needed.
Mercers said it was still unable to process the transfer without written confirmation from Chequers Wealth Management itself that qualified pension transfer specialists had checked the recommendation.
A spokesman for Mercer said the firm did not receive any letter during July confirming this recommendation had been checked by an approved specialist. Consequently, without this required information, the company had been unable to proceed.
The spokesman also said Mercer had “been waiting” for the confirmation from Chequers Wealth Management that the advice had been checked by them, which it said arrived on 19 August.
However, this letter of confirmation was not enough to progress the transfer. In an email in response, seen by Financial Adviser, Mercer asked for more documentation under regulation seven of the Pensions Schemes Act 2015.
According to Mr Pruggmayer, this “Mexican stand-off”, caused by overly restrictive rules imposed post-pensions freedoms, has now cost the client the more favourable annuity rate of £1,560 a year, as the rates available have now dropped.
“This would have been significantly more than the £1,320 a year he would get in the current scheme administered by Mercer,” he said. “It’s only £42,000 as well - not a lot of money but it would make a big difference to this client, as both he and his wife are in ill health.
“It is also now becoming as much work and stress for myself and the client as if it were a pot of £420,000. The rules are there for a reason, but there has to be some allowances made for the client’s best interests, particularly someone as ill as my client.”
The Mercer spokesman added: “It is important to guard against pensions liberation and unless a financial adviser has the necessary permission to advise on pension transfers, we cannot make the transfer.
“It is in all our interests we and the IFAs involved in this process must follow regulatory protocols that have been put in place to reduce instances of pensions liberation and unqualified advice.”
The Financial Ombudsman Service’s chief ombudsman Caroline Wayman recently said protecting customers from fraud is high on the agenda of financial services firms.
Mr Pruggmayer said he has sent a letter to the chief executive of the FCA on 22 August to highlight the situation caused by the restrictive pension transfer rules governing DB schemes.
Find out more
Earn 60 minutes’ worth of structured CPD with FTAdviser’s Guide to Pension Transfers Post-Freedoms, out on 1 September, which covers the legislation around DB to DC transfers and how advisers can navigate through this.
