Advisers should take extra care when advising clients on pensions, an adviser has urged after the cIty regulator said scheme transfers may now be suitable for some consumers.
Jon Bean said advisers must take extra care when considering a transfer for clients after a 20-page report by the Financial Conduct Authority, entitled Advising on Pension Transfers, stated that since the introduction of pension freedoms it is now proposing to remove the existing guidance that an adviser should start from the assumption that a transfer is unsuitable.
Mr Bean, a chartered financial planner for County Durham-based Eldon Financial Planning, said: “Any recommendation to transfer away from a scheme offering guaranteed index-linked benefits throughout retirement has to be taken extremely carefully.
I welcome the FCA’s proposed removal of the starting assumption that defined benefit transfers are not suitable. Given historically high transfer values, pension freedoms legislation, an increasing number of schemes in deficit, and potentially significant improvements in death benefits post-transfer a ‘neutral’ starting position now seems more rational.”
Mr Bean said that his firm has undertaken transfers for clients where it is considered appropriate and will continue to do so – but any and all recommendations must take a measured approach, with full consideration given to client’s personal circumstances and ways in which their objectives can be achieved, other than transfer.
He added that anything less would risk a sub-optimal outcome for the client.
This report said this new rule will be replaced with a statement in the FCA handbook stating that for most people retaining safeguarded benefits will likely be in their best interests. The document added that an assessment of suitability should focus on whether a transaction is right for the individual and should be assessed on a case by case basis, and from a neutral starting position. It added that the adviser needs to demonstrate that the transfer is in the best interests of the client.
The report also stressed that advisers must consider the specific receiving scheme being recommended following the transfer and the investments being recommended within that scheme to ensure that it is appropriate for the risk profile of the client.
The report has also proposed additional guidance to help advisers assess suitability and to clarify the FCA’s expectations. This guidance aims to make clear that in order to provide a suitable personal recommendation an adviser should consider various elements, which includes understanding the client’s income needs and expectations and how these can be achieved, the role safeguarded benefits play in providing this income and the impact and risk if a conversion or transfer is made.
Another aspect that the report urged advisers to consider is the way in which the funds will be accessed, either immediately or in the future, including follow-on arrangements.
It also said advisers must consider alternative ways of achieving the client’s objectives. For example, there may be ways for a client to provide death benefits which can be funded from income rather than by a lump sum funded by a pension transfer, and which does not carry so much risk.
The report said: “It remains our view that keeping safeguarded benefits will be in the best interests of most consumers. However, the introduction of the pension freedoms has altered the options available and for some consumers a transfer may now be suitable when it wasn’t previously. We therefore propose to remove the existing guidance that an adviser should start from the assumption that a transfer will be unsuitable.”
