The Financial Conduct Authority has said a great deal in recent months and years about unsuitable pension transfer advice. Its latest communication on the subject, however, addresses the subject of how to calculate redress when it is identified that the transfer was suitable.
The FCA will start a formal review of its redress guidance prior to the end of the year. In the meantime, the communication also explains the process firms should be following.
The redress calculation starts from the premise that consumers who have been inappropriately advised to transfer should be put back in the position they would have been in if they had remained in their defined benefit scheme.
Issues that must be considered, in relation to charges, when calculating the redress include:
- The redress amount should assume personal pension plan charges of up to a maximum of 0.75% per year
- The firm’s regular adviser charge must also be considered
- The pre-retirement discount rate should be netted down to allow for ongoing product charges and regular adviser charges in percentage terms up to normal retirement age
Where redress is offered as a lump sum, the customer’s tax position should also be considered. If any payment would result in the customer moving into a new marginal tax rate band, the firm must adjust the redress payment accordingly so that the consumer is not disadvantaged by the payment.
The alternative to paying the redress as a lump sum is to pay the redress amount into the customer’s personal pension by augmentation.
The FCA advises any firms who might not have followed the correct calculation procedure in the past to review those cases and to offer additional redress to any affected customers.