PensionsFeb 20 2020

Is it worth doing a DB transfer?

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Is it worth doing a DB transfer?

The shake up of the pensions landscape, following the introduction of pensions freedoms, has ushered in a number of changes – some with unintended consequences.

 

The opportunity to access their lump sum from the age of 55 has led numerous people to seek to transfer their DB pension. 

However, for all transfer values over £30,000, it is mandatory for people to seek independent advice, if they wish to progress this.

The Financial Conduct Authority (FCA) is clear about its lack of enthusiasm for DB transfers

Providing DB transfer advice has subsequently led to some undesired outcomes for both financial advisers and clients, including insistent clients seeking financial redress at a later stage.

It is fair to say that the Financial Conduct Authority (FCA) is clear about its lack of enthusiasm for DB transfers.

Last October, Megan Butler, executive director of Supervision, Wholesale and Specialists at the FCA said: “‘We have said repeatedly that, when advising on DB transfers, advisers should start from the position that a transfer is not suitable.”

The FCA has put a number of checks and balances in place, including the stipulation in its handbook that advice on pensions transfers must be given or checked by a pension specialist.

Pension specialists have until October this year to gain a specific qualification in this area if they do not have it already.

Process and Guidance

The regulator also sets out a specific process for advisers to follow, when a client seeks their advice on a DB transfer.

In summary, the process should start with disclosure (details of the services they offer and the cost). 

The adviser also needs to obtain in-depth information on the client’s personal circumstances and risk profile, as well as on their objectives and needs.

Research is also required, including comparison of the DB pension with the proposed alternative, followed by a suitability report, containing findings and recommendations (to be provided whether the recommendation is to go ahead or not).

It should include details of how the adviser arrived at that decision and why they think it is the right thing to do.

The client can also expect information on the importance of ongoing services, including regular meetings and reviews of investments, particularly if the advice is to make the transfer.

There is also guidance available for advisers, in the form of the Personal Finance Society’s ‘Gold Standard’, a voluntary code of good practice for DB transfer advice, based on a set of nine principles.

These include helping clients understand when advice is appropriate and the cost of transferring benefits, as well as ensuring that the advice supports the client’s overall wellbeing, within the context of their stated objectives.

It also emphasises that advisers should ensure that the client understands and accepts all charges.

In addition, the code highlights the importance of transparency with regard to managing conflicts of interest, as well as with regard to advice processes and outcomes.

It also encourages advisers to avoid unregulated investments and introducers. 

Advisers' DB transfer experience and practice

So, how do advisers manage DB transfer enquiries on a day-to-day basis, against this backdrop?

Scott Gallacher, financial planner at Rowley Turton says: “We’ve had about a dozen enquiries, but I’m not sure if any have progressed.

“If people come to us, we first have an initial, generic conversation, pointing out the FCA’s view that their DB pension is a secure benefit and that they should have good reason for transferring it.

“Next, we send them a link to a video and a consumer guide and spell out our charges.

"It’s very rare that people come back to us after that, but then, we are very cautious about it.

"Perhaps the cost puts them off, or maybe they realise that they are better off leaving their pension where it is.”

However, the FCA also states that it recognises that for some DB scheme members, transferring their pension might be the right course of action.

And some advisers are finding that it is sometimes suitable, as Carl Lamb, adviser and founder of Almary Green explains: “We have the permissions to do it and there are genuine reasons why some people should transfer their DB pension. It depends on their personal circumstances.

He adds: “Having to pay for the advice regardless of the outcome means they take it more seriously.”

Another adviser, Anna Sofat, associate director at Progeny Wealth has decided not to offer the service any more, as she explains: “We used to review DB schemes as part of our annual review with clients, but there are just too many hoops to jump through now.”

Ms. Sofat sees this development as detrimental to consumers: “This outcome doesn’t serve clients very well and the regulation is therefore not fit for purpose.”

The cost to advisers

Other advisers have chosen not to get involved at all, or to stay on the sidelines.

Yet they are still feeling the impact on their business, when it comes to professional indemnity (PI) premiums.

These have been affected by the risks involved in advising on DB pension transfers.   

As Phil Anderson, founder and financial planner at Phil Anderson Financial Services explains: “We refer on DB transfer enquiries to two other companies, because we don’t have the permissions.

"But this in itself puts our PI premium up, even though the other firms are liable.

Our PI insurance has gone up from £2.5K to £18K per year in the last four to five years.

"While turnover is increasing, this is quite a cost for a small business.”