Defined Benefit  

What makes a good or bad pension transfer?

  • Explain the FCA's approach to DB transfers
  • Identify examples that would make a good DB transfer
  • Identify examples that would make a bad DB transfer
What makes a good or bad pension transfer?
Credit: Anna Shvets/Pexels

The UK pension landscape has seen seismic changes over the past decade for advisers and clients alike.

Auto-enrolment (2012) ensured UK employers must put employees into a pension scheme, while the start of pension freedoms (2015) permitted flexi-access drawdown for the first time. 

And then there are the Safeguarded Benefits (2015).

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Few changes in the industry have attracted as much attention or created as much of a talking point as the introduction of safeguarded benefits within the Pensions Schemes Act 2015.

Within this act, the UK Government placed a requirement on individuals with safeguarded pension benefits above £30,000 to seek and take financial advice from an FCA regulated adviser prior to transferring their pension. 

 As such, anyone wishing to complete a final salary (Defined Benefit) pension transfer, could no longer take that transfer-out decision independently.

To give up their safeguarded benefits they had to first prove they had been through the advice process or ‘DB pension sign-off’ as it more colloquially referred to.

This system was reinforced with the FCA stating clear guidelines to all UK ceding schemes with penalties being enforced for any transfers being permitted without evidence of the required advice. 

This legislation is a contentious topic. A number of my clients have outlined their frustration at the system.

Feeling as if they have worked hard only to be told they cannot do as you please with their pension pot and must seek (and pay) for financial advice.

The flip-side of this is the FCA trying to protect those same individuals from giving up their safeguarded benefits without understanding the true extent of their actions and what they may be giving up.

In the years that followed, the FCA deemed the number of ‘suitable’ transfers as too high and continued to apply further attention and restrictions: even issuing a number of IFA firms with notice to immediately cease all DB sign-off activities due to the number and volume of suitable transfers they were advising.

The FCA’s stance is clear. The advice process for the transfer off final salary pensions (safeguarded benefits) “should start by assuming that it will not be as suitable” as their existing scheme and thus will not be in the clients best interests.

Best practice

So what may a good or bad DB transfer look like? 

 As stated in the FCA’s Handbook: “A firm should only consider a transfer, conversion or opt-out to be suitable if it can clearly demonstrate, on contemporary evidence, that the transfer, conversion or opt-out is in the retail client’s best interests.”

Each client's situation and needs are different, and you should always seek professional advice before making an informed decision.