Emma Ann HughesFeb 24 2017

Buyer beware needed for pension transfers

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The announcement came in the midst of an unprecedented surge in demand for DB transfers, a result of pension freedoms and record transfer values.

My first thought? Prudential are brave.

Transferring pension benefits is usually irreversible. 

The merits or otherwise of the transfer may only become apparent years into the future. 

It is important that firms advising on pension transfers ensure that their clients understand fully the implications of a proposed transfer before deciding whether or not to proceed.

I fear that the government of the future will look back and question how an adviser could justify “recommending” a client give up a guaranteed amount of money .

My fear – which I know is shared by many of you – is that just because the client could clearly understand the ramifications of a quick cash hit replacing a steady income in the future today does not mean they will remember this in the future.

With no long stop, recommending a pension transfer may not come back to bite you today or tomorrow but a long way off down in the future.

I fear people who were keen to get their hands on their £35,000 defined benefit pot today will forget that desperation for cash in their hand when they are sat in front of a single heater, freezing to death in their retirement way off in the future.

I fear the government of the future will look back and question how an adviser could justify “recommending” a client give up a guaranteed amount of money when they will no longer be able to earn for taking a lump sum when they could still generate income.

Today’s regulators are crystal clear in what is expected of advisers recommending pension transfers today.

Last month the FCA revealed concerns that some firms had been advising on pension transfers or switches without considering the assets in which their client’s funds will be invested. 

The regulator stated it was concerned that consumers receiving pension transfer advice in this post pension freedoms world were at risk of transferring into unsuitable investments or – worse – being scammed.

The City watchdog stated a firm advising on a pension transfer from a defined benefit (DB) scheme or other scheme with safeguarded benefits must consider the assets in which the client’s funds will be invested as well as the specific receiving scheme. 

It is the responsibility of the firm advising on the transfer to take into account the characteristics of these assets.

I agree with the regulator on this stance but ultimately I am also aware the general regulatory environment has created a climate of fear that makes advisers extremely nervous about recommending a pension transfer in 2017.

I am sure more advisers would be happy to assist with pension transfers – a service that is in great demand - if the regulator either introduced a long stop or introduced an element of “buyer beware” in terms of this area.

When buying an item of clothing in the sales that is dirt cheap because it has been sat on the rack for a while and tried on by several individuals, some shops will warn you at this price you only have the option of returning it within seven days of purchase.

Basically with this warning they are flagging this is a “buyer beware” purchase.

This type of warning is what is needed with pension transfer advice.

Perhaps an A4 sheet, in 24 point caps, that states “Please tick if you understand by taking this money now you could freeze to death in retirement and have no right to demand compensation from me.”

Pension transfer advice is needed. If the regulator and government wants more advisers to offer it then they need to make sure intermediaries are confident this area of advice won’t come back to haunt them.

Financial advisers do not want to face a compensation bill that could result in them freezing to death in retirement.

emma.hughes@ft.com