As such there will be few savers who can make these choices without some form of financial advice or guidance.
Savers considering transferring from defined benefit (DB) into defined contribution (DC) schemes also face these challenges.
This makes it even more crucial that the support they are given is comprehensive and in their best interests.
While the vast majority of advisers are doing the right thing by their clients, the Financial Conduct Authority (FCA) published findings on pension transfer advice found there are reports of poor practice in this area of advice work.
This has raised concerns and therefore it is right the regulator works to strengthen consumer protection through its new consultation paper, 'Improving the quality of pension transfer advice'.
One of the main concerns raised in the FCA’s consultation is around the use of contingent charging.
Some in the industry believe a ban on contingent charging could make it harder for people with small to medium transfer values to access advice.This is not the first time its merits have been called into question, with the Work and Pensions Committee previously stating it is “a key driver of poor advice” and recommending a ban back in February.
The committee said: “Genuine independence is not compatible with a charging model that only rewards advisers for recommending a particular course of action.”
The Pensions and Lifetime Savings Association (PLSA) supports a ban in principle, as we believe incentives for poor practice for DB to DC transfers must be eliminated.
We all know that DB to DC transfers should only be carried out when it is clearly in a client’s best interest to do so. It’s therefore vital that we work with the regulators to protect vulnerable consumers.
There is currently no publicly available information from the FCA or The Pensions Regulator on the scale or scope of DB to DC transfers.
In short, we do not know where the consumer demand for transfers is coming from.
For instance, are they mainly from small transfer values (that is, £30,000 to £100,000), from medium transfer values (that is, £100,000 to £250,000) or large transfer values (that is, £250,000 plus)?
The lack of data on the transfer value sizes, as well as information on what is being done with the money once it has been transferred, makes it very difficult to fully understand the potential negative impacts for savers who are transferring.
Some in the industry believe a ban on contingent charging could make it harder for people with small to medium transfer values to access advice.
It is possible that low-cost advice options could be found in new technological advancements, which have led to a rise in automated advice and other digital tools.
As DB to DC transfers will likely continue to remain popular, we urge the new Single Financial Guidance Body to develop further guidance on this issue for those with small to medium transfer values.
This could also be an opportune time for the Pensions Advice Allowance to be revisited, to help create greater access to affordable financial advice.
This consultation is an important step forward in helping people achieve the right outcomes in retirement.
This is an area where consumers are at risk of losing valuable benefits that have not been properly explained to them and intervention is necessary to ensure the right safeguards are in place.
We want the regulator to continue to work on ensuring consumers understand what they would be giving up; that their retirement income will need to meet their needs in later life, as well as ensuring that people are protected from scams, and that the advice they receive is fit for purpose.
Tiffany Tsang is policy lead, LGPS and DB at the Pensions and Lifetime Savings Association
