There is widespread distrust among pension transfer clients towards their advisers and the motivation behind recommending a transfer, according to new research.
A study conducted by independently-owned investment house Killik and Co, found almost half of those who transferred out of their defined benefit scheme feared their financial adviser might have been incentivised to recommend the transfer even though it may not have been in their best interests.
Killik & Co surveyed 2,000 adults in the UK aged between 55-65 and found of those that consulted a financial adviser regarding their DB or DC pension, more than a third (37 per cent) had either ‘lots’ or some concerns over trusting their adviser.
About 39 per cent were concerned their adviser might be incentivised to recommend a course of action that might not be in their best interests, equating to 45 per cent of all those that transferred out of their DB pension.
According to Killik the research highlighted the problem with contingent charging.
Some financial advisers charge a ‘contingent fee’ to advise on DB transfers, where they receive a portion of the funds released if the transfer proceeds.
MPs called for a ban on contingent fees on DB transfers last year, worried the practice could lead to systemic mis-selling.
What's more, FCA findings in December 2018 suggested that less than half the transfer recommendations it investigated were deemed suitable.
While all DB pension savers must receive approval from a financial adviser before transferring out of their schemes worth £30,000 or more, the same is not necessary for cash withdrawals from DC pensions.
Killik found a mere 18 per cent of DC pension savers consulted a financial adviser before withdrawing funds and of these only half followed their adviser’s advice.
Svenja Keller, head of wealth planning at Killik & Co, said: "It is clear that a distrust of financial advisers and the possibility of being scammed are dissuading pre-retirees from accessing financial planning advice.
"The fact that half of those transferring out of DB schemes are concerned about the motivations of their financial adviser is of particular concern – as their fears have a very real, logical base.
"How can an adviser charging a contingent fee advise their client impartially on whether a transfer is beneficial when they will only be remunerated if the transfer goes ahead.
"This is a great shame as, in some cases, accepting a lump sum and transferring out of a DB scheme may genuinely be in a client’s best interests.
"The need for such advice is also shown by the fact that pre-retirees are taking money out of tax-efficient pensions and putting them into taxable savings and investments.
"It is incumbent on our industry and the government to safeguard the security of our nation’s pension savings."
According to Killik and Co, many of those who have withdrawn funds since the pensions freedom reforms have put a quarter of their money into a savings account and another quarter into investments.
But rather than withdrawing their entire pensions savings as allowed under the freedoms, pre-retirees aged 55-65 largely refrained from cashing bin large sums.
This was due to fears of running short in retirement, pension scammers and financial advisers’ partiality, Killik stated.
Half of the respondents either have or used to have a defined benefit pension. Of these 17 per cent had accepted a lump sum, or ‘cash equivalent transfer value' and transferred their DB savings into a defined contribution scheme.
Separate research from AJ Bell showed the amount withdrawn regularly from pensions now is almost a third lower than 12 months ago, at 4.7 per cent, as savers tread carefully amid market volatility and Brexit uncertainty.
The survey of 554 people aged 55 and over that have entered pension income drawdown since April 2015 found one in 10 investors had experienced a significant drop in fund value since entering drawdown, and about half were cutting withdrawals as a result.
The company said savers appeared to be reacting to market volatility and Brexit uncertainty, with expected investment returns down from 4.83 per cent to 4.15 per cent.
Tom Selby, senior analyst at AJ Bell, said: "Pension freedoms investors appear to be responding sensibly to difficult market conditions and Brexit uncertainty. The fact many people are adjusting their investment expectations and cutting withdrawals in response to negative returns is an encouraging sign.
"With the FTSE100 expected to provide dividend returns of 4.9 per cent in 2019, investors may be able to apply a ‘natural yield’ strategy and maintain their lifestyle in retirement without eroding their capital.
"This will, of course, rely on retirees taking sufficient risk and the underlying companies delivering the anticipated shareholder payouts."
