To switch or not to switch? That is the question. But what is the right answer when it comes to switching from one defined contribution scheme to another defined contribution scheme - and what is the regulator's view?
Much time and effort has gone on in recent months to debate the merits or otherwise of defined benefit (DB) to defined contribution (DC) transfers.
However, one subject which has been put into the shade is that of pension switching – moving from one DC pension wrapper to another.
It is now more than 15 years since Isaac Alfon wrote the then Financial Services Authority (FSA) occasional paper called To switch or not to switch, that’s the question - An analysis of the potential gains from switching pension provider.
Things have certainly moved on since then, though the picture hasn’t become an awful lot clearer, with many issues for an adviser to consider when analysing the advantages and disadvantages of moving from one defined contribution arrangement to another.
To bring things slightly more up to date, this year sees the 10th anniversary of the FSA thematic review. It is worth reminding ourselves of the high-level findings of this review, looking at the main reasons the FSA considered the advice to be unsuitable in the 16 per cent of cases they found to be so.
- The switch involved extra product costs without good reason (79 per cent of unsuitable cases).
- The fund(s) recommended were not suitable for the customer’s attitude to risk and personal circumstances (40 per cent of unsuitable cases).
- The adviser failed to explain the need for, or put in place, ongoing reviews when these are necessary (26 per cent of unsuitable cases).
- The switch involved loss of benefits from the ceding scheme without good reason (14 per cent of unsuitable cases).
Following the launch of Pension Freedoms on 31 March 2017, the FCA introduced a cap on customers eligible to access their contract based personal pension – i.e. from age 55.
This confirmed if a customer takes out a plan on or after 31 March 2017, including any top-ups to these plans, there will be no surrender charges on funds withdrawn or switched from these plans at age 55 and above.
Also, no surrender charges will apply if they are able to take benefits earlier than the minimum early pension age of 55 - the protected pension age.
If a customer has taken out a plan before 31 March 2017, including any top-ups made to these plans, any existing surrender charges will be capped at 1 per cent of the funds withdrawn or switched at age 55 and above.
Any surrender charges will also be capped at 1 per cent if they are able to take benefits earlier than the minimum early pension age of 55.
January 2017 bought us the FCA release – Advising on pension transfers: our expectations. This gave some further information on the FCA's requirements on pension switches.
In particular a concern was stated that “some firms have been advising on pension transfers or switches without considering the assets in which their client’s funds will be invested. We are concerned that consumers receiving this advice are at risk of transferring into unsuitable investments or – worse – being scammed”.
Finally, the recent FCA discussion paper DP18/1 on ‘Effective competition in non-workplace pensions’. Though not directly linked to pension switching it does talk about potential barriers to switching such as the difficulty in identifying and comparing charges, as well as they have concerns about reduced competition of charges, fund choice and the use of defaults.