Why can’t I transfer my final salary pension?
When John Salton wanted to transfer out of his final salary defined benefit (DB) pension worth £600,000 to retire early, travel more and take on new hobbies, he thought he would make a good candidate.
Salton, 55, has three pension pots and owns two properties with his wife, who also has her own pension.
But his adviser recommended that he remain in his DB pension.
“I’m pretty disappointed,” Salton said. “My pension money is out of my control and someone else has a say over what I can do about it.”
His case is a predicament facing many on the cusp of retirement. Five years ago, though, he may have received a different decision.
As the Financial Conduct Authority (FCA) has brought in measure after measure — such as the ban on contingent charges where the adviser was only paid if the transfer occurred — to clean up a history of poor advice in the pensions transfer market and protect consumers, it has become tougher for advisers to operate in this space.
Meanwhile, the risks associated with giving DB transfer advice have grown, sending adviser professional indemnity insurance (PII) and regulatory fees skyrocketing. Client fees have increased as a result.
Colin Tanner, a financial adviser at Tanner Financial Advice, said he had seen his PII premium jump by 363 per cent and regulatory costs increase by 306 per cent in three years, despite not even advising on pension transfers.
Transferring out of a DB pension means giving up a guaranteed income for life for a lump sum, which attempts to match the pension being given up. But the transfer value offered is at the discretion of the scheme’s trustees.
Recent FCA data show about 1,000 firms have left the DB market over the past two years. Firms not having adequate PII for this form of advice has been cited as a key reason.
Over the past four years, the FCA has also changed its stance towards DB pension transfers.
Initially proposing in 2017 to be more neutral — removing the guidance that an adviser start from the assumption that a transfer would be unsuitable — the regulator in 2018 backtracked, saying it would maintain its “unsuitable” stance.
The FCA found significant evidence of unsuitable advice, including in relation to the British Steel Pension Scheme.
Everyone agrees the quality of DB transfer advice needed to improve.
Dominic James Murray, financial adviser at Cameron James, said: “[FCA scrutiny] has raised the bar for the quality of advice. Sometimes people need protection from themselves because they do not realise the benefits they are giving away.”
Kate Shaw, chartered financial planner at Financial Life Planning, added: “There is great need for advice in this area and it has become more difficult to do the business, but that can only be a good thing. It needs to be difficult, because nine times out of 10 it is not the right thing for clients to do.”
But have the measures gone too far?
“Each change to the process that the FCA brings in takes more people out of the market,” Shaw added.
“Unfortunately, it is taking out some of the good folk as well and not necessarily getting rid of some of the big companies doing high volumes [of transfers]. Overall I still think it is in a better place than it was a few years ago.”
Sir Steve Webb, former pensions minister and partner at pensions consultancy Lane Clark & Peacock, added: “I know good quality advisers who have just given up on transfer advice because it is not worth the risks. One imagines that [of] those people who are keen to make money out of it, there are still plenty of them around.”
So where now for people like Salton who have been advised against a transfer?
They may be able to go ahead with the transfer, and go down the “insistent client” route, demanding that their adviser press ahead, although many advisers are now reluctant to do this.
They could find another adviser, who might be happy to complete the transfer, but they would have to pay another fee, or they could revisit the issue at a later date.
Webb said: “One key point is to recognise that there are often flexibilities available within the DB scheme. Make sure you explore these.”
These could include taking early retirement, varying the percentage of the total pension taken in the form of a lump sum, or the option of a partial transfer.
Shaw added: “Sometimes people forget the value of their DB scheme. If they want to retire early and have other personal pensions and savings then these can be used to bridge the gap between retirement and the scheme normal retirement age or state pension age.”
Using equity release could be an alternative option for some to consider.
Applying for a transfer
It is not a hard and fast rule, but the FCA has provided some guidance on who is best suited to a transfer.
These include individuals who do not rely only on their DB scheme to meet their income needs and will usually have other sources of retirement income, for example, other pensions and investments.
Alternatively, they may be managing income for wealth or tax planning by taking it sooner or later, in a way that does not affect their ability to meet expenditure needs throughout retirement.
Or they may have a limited life expectancy and want their family to be financially secure on their death.
There may also be rare occasions when those in serious financial difficulty could benefit from a transfer.
Webb said transfers might also be suitable where a person is divorced and has children they want to pass their wealth to. If they die with a DB scheme, the pension dies with them.
In some cases, the terms on a transfer might be more generous than the terms on remaining in the DB scheme.
Webb added: “There are plenty of reasons not to transfer, and it is right to assume that most people shouldn’t but there will be individuals for whom it makes sense.”
But trying to find affordable high quality advice is not an easy task. Searching online will not tell you who is a good or bad adviser.
Webb suggested one way to address this could be for more pension scheme trustees to recommend good quality advisers that members can use — a trend he is seeing more frequently.
This tactic has already been employed by retail giant Tesco. It went even further and appointed a third-party governance provider to monitor the transfer advice provided by the two firms appointed to give retirement support to 220,000 members of its £13bn pension scheme.
As lockdown is lifted and the full measure of coronavirus is felt, it has been predicted that there will be mass redundancies prompting many more to seek a DB transfer.
The pandemic has also caused many to reassess their life choices — to use their pension and make hay while the sun is still shining.
Ima Jackson-Obot is deputy features editor of FTAdviser; Twitter