How will the new pension transfer restrictions work?

How will the new pension transfer restrictions work?
Photo by Darius Krause from Pexels

According to the Financial Conduct Authority, a total of £2,241,774 worth of of pension-scam losses has been reported to Action Fraud since the start of 2021 (between January and May).  

In a further effort to prevent pension scams, regulations coming into force on November 30 will require checks to assess whether a pension transfer request meets certain conditions to enable a statutory right to transfer.

The regulations will empower trustees and scheme managers to prevent a transfer request when a ‘red flag’ is present; for example, if a scheme member requests a transfer after receiving unsolicited contact or has been offered an incentive to transfer.

In instances of any ‘amber flags’, such as investments that would normally only be offered to sophisticated investors, a member must obtain guidance from the government's MoneyHelper service before the transfer may go ahead.

Differences of opinion 

The Department for Work and Pensions reported concerns from consultation respondents that savers may feel inconvenienced if they have to obtain guidance after having already taken advice.

However, the department says it believes that the requirement should be retained: “Financial advice provides an invaluable service for pension savers through formal recommendations on how to use savings to achieve the retirement envisaged, especially the risks of giving up a guaranteed income for market dependent returns, but does not provide scam specific guidance.

“DWP is also concerned that an exemption for the guidance requirement for those who have taken financial advice could be exploited by scammers.”

But Helen Cavanagh, consultant at XPS Pensions Group, says: “We would expect well-advised members to pass one of the conditions set out in the regulations, and so the impact on these members should be limited.”

The DWP says it expects the requirement for guidance from MoneyHelper will be rare where advice has already been taken, and likely only to arise when an adviser recommends an 'insistent saver' not to transfer.

Around one in 10 transfers (at least 12 per cent) could have been blocked over the past year if the new regulations had been in force, according to XPS Pensions Group.

But Kathy Cruse, director, quality assurance at Willis Towers Watson, describes the changes as “far reaching” in impact: 

“They actually affect all transfers, to the extent that there is a need to change member communications to include references to these new requirements, even where there is no direct impact on the due diligence steps that are needed and which are typically already in place.”

While the strengthening of transfer regulations will make a “real difference in the fight against pension scams”, according to Cavanagh, she adds that the new regulations are not a panacea: “[They] only cover a limited number of warning signs and cannot be expected to capture all possible scams. If trustees are only considering the flags in the regulations, then they may miss other scam warning signs.

“Our experience is that in the past year, half of even those transfers that could have proceeded under the new regulations exhibited at least one warning sign of a scam or potential poor member outcome that is not captured by the new regulations, such as the member being advised that they are able to access their benefits before age 55, despite not being in ill health, or the member being promised a guaranteed return.