PB Financial Planning Limited has been told by the Financial Ombudsman Service it should have realised a pension transfer was high risk and recommended a client stick with their final salary scheme.
The intermediary firm has been told to compensate a client it told to ditch his final salary scheme back in April 2008.
The then 37-year-old client, referred to as Mr B, met with the adviser back in 2008 to discuss his former employer’s final salary pension scheme, which was offering an enhanced transfer value if he transferred out of the scheme at that time.
The pension was for employment between April 1998 and April 2007 and the transfer value offered was increased by 64 per cent from £16,686 to £27,370.
The scheme was willing to pay £500 plus VAT towards the cost of financial advice.
Mr B’s options were to leave the deferred benefits within the scheme or to have the increased transfer value paid to a personal pension plan.
The adviser’s recommendation letter stated the advice was only about the pension and that Mr B’s other financial circumstances were not discussed. It was recorded that Mr B had a medium attitude to investment risk.
The adviser said that investments would need to grow by 8 per cent each year to provide the same benefit value as the scheme would.
The adviser stated: “I must stress that this [is] investment risk is a crucial factor and you should carefully consider if you are comfortable accepting the risks involved in transferring to your own personal arrangement.”
Under the heading ‘Investments’ the report from the pension transfer specialist stated: “Once I have facilitated the transfer from (name of employer) to a personal pension contract the ongoing responsibility for the maintenance will be transferred to Company A.
“Mr X will discuss your investment strategy for this scheme and therefore as a temporary measure we will move the funds into a cash deposit account so Mr X can advise you on asset allocation and investment risk.”
There was a significant risk that on retirement after transfer the value of the benefits being provided would be lower than the benefits from the scheme. Adrian HudsonIn February 2015, some seven years later, Mr B became aware the funds had been transferred but never invested.
He found out the transfer amount was still held in a cash-based account and contacted PB Financial Planning Limited.
In a final decision, ombudsman Adrian Hudson said PB Financial Planning Limited should have been aware that in 2008 the regulator was requiring businesses to provide pension projections assuming standard rates of growth of 5 per cent, 7 per cent and 9 per cent.
Therefore, Mr Hudson said a return of 8 per cent to just match the benefits was likely to be a high risk transaction.
In order to make the decision to transfer worthwhile and to ensure that benefits on retirement were greater than those that were being given up, Mr Hudson said a return of say 1 per cent or 2 per cent more was going to be required.
He said this would have resulted in a return of 9 per cent or 10 per cent being required.
Mr Hudson said: “In my opinion the business should have realised that the transfer was high risk. That means there was a significant risk that on retirement after transfer the value of the benefits being provided would be lower than the benefits from the scheme.”
To calculate how much compensation should be paid to Mr B, Mr Hudson said a notional fund value should be used assuming the transfer value was invested shortly after the report was agreed in a managed fund.
If a loss is established the firm should ascertain if Mr B’s occupational scheme can be reinstated. If not arrangements should be made to augment Mr B’s personal pension provision by that amount.
If this is not possible the firm was told to pay any redress due direct to Mr B as a lump sum after first making a deduction of 15 per cent.
This deduction is to allow for the fact that if the redress had been paid into a pension arrangement then Mr B could have taken 25 per cent as tax free cash, and that balance would have been used to provide an income that would have been taxed at Mr B’s marginal rate of tax (assumed to be 20 per cent) taken from the remaining 75 per cent.
On top of this, PB Financial Planning Limited must pay Mr B £250 for the distress that he has experienced.