Defined Benefit  

Three ways to fix contingent charging problem

Three ways to fix contingent charging problem

As the debate about contingent charging heats up, pension providers and financial advisers have proposed three alternatives they believe will make pension transfers safer for consumers.

After a consultation from the Financial Conduct Authority (FCA) on the topic last year, the contingent charging debate has made a come-back, as the Work and Pensions select committee launched an inquiry into charging structures for financial advice on DB transfers in January.

The industry seems to be divided on this topic - with firms like LEBC supporting a ban and the Personal Finance Society recently making a U-turn on their position on the matter to turn against a ban.

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Now a number of experts have come with solutions they believe could solve the problem.

Sir Steve Webb, former pensions minister and director of policy at Royal London, said one alternative could be to fund transfer advice with a debit from the member’s rights under the DB scheme.

He said: "DB schemes are already familiar with applying pension debits, for example in the case of ‘scheme pays’ for pension tax charges or in the case of pension sharing on divorce."

By way of example, a person who's cash equivalent transfer value is £200,000 and where the cost of providing advice is £4,000, if the transfer went ahead, the member would receive a transfer of £196,000 and the advice cost would have been covered.  

But if the transfer did not go ahead, the member would simply receive 2 per cent less in DB benefits when he/she retired.

"This is unlikely to make a material difference to their standard of living in retirement but would allow more people to access transfer advice," Sir Steve said.

Kay Ingram, director of public policy at national IFA firm LEBC, explained this feature was already used where annual and lifetime allowance excess accrual is used to pay the HM Revenue & Custom recovery charge.

She said: "It is mandatory for schemes to offer this where the tax bill is £2000 or more. The member’s benefits are then actuarially adjusted.

"So scheme administrators already have a process in place which could be adapted to pay advice charges where the member requests this."

Nathan Long, senior analyst at Hargreaves Lansdown, agreed this could be a credible alternative to contingent charging.

However, he warned the "admin hurdles and penal rates that income is given up in return for cash from DB schemes make any introduction challenging".

He added: "Overall the key remains to reinforce the message that these kind of transfers are rarely in members’ best interests."

Another solution proposed by Ms Ingram – who is in favour of a contingent charging ban – is to make the advice allowance mandatory for providers.

The allowance, which came into being in April 2017 following a recommendation in the Financial Advice Market Review, allows pension scheme members to withdraw £500 a year tax-free, up to three times in their life, to pay for financial advice.