Pension transfer rules changed from 1st October 2020, but what does that mean?
What is a Defined Benefit Pension?
A Defined Benefit (DB) scheme is a pension that is characterised by a promised income (or “benefit”) in retirement. The benefits will largely be determined by length of membership in the scheme and earnings whilst a member.
An active member of a Defined Benefit scheme may contribute to their scheme however this may not have a direct correlation to the pension they receive in retirement. The employer is responsible for ensuring the pension scheme is sufficiently funded to meet the income needs of its members.
What are the rule changes and why have they been introduced?
The Financial Conduct Authority (FCA) released a policy statement in June 2020, following a consultation on Defined Benefit transfer advice that had been provided between April 2015 and September 2018. The core concern for the FCA had been “the proportion of consumers that firms have advised to transfer appears too high”.
The FCA states that “we think most consumers are best advised to stay in their DB scheme” and noted particular concern over high charges levied upon the transfer taking place.
The policy statement indicated a range of sweeping reforms in Defined Benefit advice, which came into effect on 1 October 2020. The key changes are outlined below.
The end of contingent charging.
An adviser can no longer undertake a review of a Defined Benefit Pension without cost and only charge a fee that is contingent upon the transfer.
If an adviser is undertaking a full review and providing advice on a Defined Benefit Pension, they must now charge the same fee for recommending whether to remain in the scheme or to transfer.
The introduction of “abridged advice”.
The “abridged advice” process is a method of informing an individual of what their Defined Benefit pension could provide if it was retained. This will be a short form of advice that will not focus on transferring and could provide clarity to consumers, without the need for a full advice process.
Ensuring workplace pension schemes are considered.
The FCA is placing a greater focus on workplace pension schemes and whether, for those who transfer, they are suitable receiving schemes.
An improvement on how advisers disclose their charges.
To provide greater clarity and choice to the consumer, should a transfer be considered, the FCA has mandated a summary page be included with advisory reports.
This summary will outline all ongoing advice and product charges expected within the first year and this will be clearly stated in monetary terms and also as a percentage of the income you could expect to receive from the current scheme.
Technical requirements of advisers.
The policy statement includes a greater requirement for Pension Transfer Specialists to engage in ongoing professional development specifically in this area. In addition, advisers will also need to meet a minimum qualification level in investment advice to complement their understanding of pensions.
Should I transfer my Defined Benefit pension?
The transfer of a Defined Benefit pension is an irrevocable decision that is unlikely to be in the interest of most people.
Anyone wishing to transfer a Defined Benefit pension, with a Cash Equivalent Transfer Value (CETV) above £30,000, will need to obtain financial advice to ensure they understand the risks and benefits of considering a transfer.
An individual who decides to transfer a Defined Benefit pension to a Defined Contribution pension should not take this decision lightely. The disadvantages can often outweigh the valuable guarantees that are given up.
A member of an “unfunded” public sector pension scheme is unable to transfer.
Who provides Defined Benefit Pensions advice?
This area of financial advice is highly regulated and requires financial advisers to meet additional requirements, as determined by the FCA.
A financial adviser is required to obtain specific qualifications and maintain a greater level of continued development to become a “Pension Transfer Specialist”.
How can we help?
If you are considering transferring a Defined Benefit pension, we strongly recommend that you read our Defined Benefit Pension Transfer guide in the first instance. If you are aged 45 and over, are a homeowner and have a pension value of £250,000 or more, please get in touch and speak to one of our expert independent financial advisers who would be happy to help..