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28 Jun 2017

FCA tightens up rules on pension transfer advice

The Financial Conduct Authority (FCA) has proposed new rules regarding the advice that is given to consumers considering transferring their pension.

The proposals relate to advice on pension transfers where savers have safeguarded benefits, primarily for transfers from defined benefit to defined contribution pension schemes.

It comes after an alert from the FCA in January, which said: “We are aware that some firms have been advising on pension transfers or switches without considering the assets in which their client´s funds will be invested. We are concerned that consumers receiving this advice are at risk of transferring into unsuitable investments or — worse — being scammed.”

The regulator went on to state: “We expect a firm advising on a pension transfer from a defined benefit scheme or other scheme with safeguarded benefits to consider the assets in which the client´s funds will be invested as well as the specific receiving scheme. It is the responsibility of the firm advising on the transfer to take into account the characteristics of these assets.”

Building on that alert, the new rules outline the FCA´s expectations of advisers and pension transfer specialists to ensure that consumers receive advice which considers all relevant factors.

The proposed changes include requiring transfer advice to be provided as a personal recommendation, and replacing the current transfer value analysis with a comparison to show the value of the benefits being given up.

According to the FCA, the proposals aim to ensure that advice fully takes account of an individual´s circumstances so that consumers make the right decision for them.

Since the introduction of greater pension freedoms in April 2015, consumers have more options available to access their pension savings.

Research by mutual insurer Royal London recently revealed that financial advisers have seen an increase of more than 50% in the volume of transfers out of final salary pensions over the last year. The most common transfer value is in the £250,000 to £500,000 range — more than the value of the average home.

The vast majority of clients transferring are in their 50s, and the typical cash sum offered is between 25 and 30 times the value of the annual pension given up. However, one in four advisers reported that most of the transfers that they deal with are worth 30 to 40 times the annual pension forgone.

When asked why people who have received advice want to go ahead with the transfer, the top five reasons were:

1. The ability to provide more flexible income in retirement

2. Large current transfer values

3. Inheritance considerations

4. Access to greater tax-free cash

5. To take benefits earlier than in the defined benefit scheme

Commenting on the findings, Royal London director of policy Steve Webb said:

“It is clear that large and growing numbers of people are choosing to exchange the promise of a regular pension in retirement for a large cash lump sum. For some people, the value of their pension pot will be greater than the value of their house. This makes it all the more important that people think very carefully before making a transfer, and take full account of independent financial advice before making such an irrevocable decision.”

Copyright © M2 Bespoke 2017

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