Charges are at the front of the Financial Conduct Authority’s collective mind once again as it has outlined a plan to ban contingent charging for defined benefit pension transfer advice.
It is easy to see why the FCA may think this is a problem, since contingent charging means the adviser is only paid when a transfer is actioned.
The danger, it feels, is that an adviser may look to move a DB pension to a defined contribution scheme so there is a one-off payment for the advice, and then potentially ongoing trail payments that could last for anything from 20 to 30 years.
There is merit to this, even though many advisers will rail against the concept as they would not dream of advising in their own interest rather than their client’s.
But clearly, it still happens. On the other hand, the FCA has changed the rules in many areas over the years to ensure advisers are not able to put profit over client interest, so the fact this is still such a big concern is, in itself, a concern.
An interesting aside to this is that for years in the 1980s the government was encouraging people to move from a company pension – where they and an employer were paying in – to a personal pension, which ultimately resulted in the pension mis-selling scandal. Funny how quickly this history is forgotten.
But I digress. Do not think the FCA’s proposal means those measures to clean up the adviser industry have not worked, after all many people have left the independent financial advice arena as it has become more professional, and losing those who do not want to play by the rules can only be a good thing.
But no matter how hard you try, there are still people in every industry that will do what they can to feather their own nest.
So, now the FCA is targeting DB transfer advice. Given the benefits a DB pension confers on the recipient, it is understandable that any large amount of transfers to a DC pension will start alarm bells ringing.
Why would you choose a DC over a DB? Well, there could be a number of reasons, including those benefits only being available if the company offering the pension is still in business when you come to retire.
Otherwise you would be falling back onto the Pension Protection Fund, and the benefits of that are not going to meet what you would get from your DB scheme.
The current level of pension paid by the PPF is 90 per cent of the pension you would have received, but this is capped at £40,020 at age 65.
But this is also subject to the 90 per cent rule, so the actual maximum you would receive is £36,018.
For the vast majority of people this will easily be enough to meet their pension expectations. For some it will mean a cut in pension income, and with many people earning much more than this, the limit could be something to be considered for some.