The Financial Conduct Authority (FCA) has been concerned about the quality of firms’ pension transfer advice for some time, especially as the regulator believes that transferring out of a defined benefit (final salary) scheme will only be suitable for a minority of clients.

The FCA has now issued a video aimed at savers who have defined benefit pension provision, as well as those that may have already been advised to transfer.

The video is presented by Mark Goold, who will be familiar to many firms who have attended FCA events. The initial points he makes are:

  • Whether or not to transfer is a complex decision
  • It will not normally be in someone’s best interests to transfer out
  • Ideally, savers should seek professional advice before transferring out, even if the value of their pension pot is below the £30,000 threshold at which providers will not accept transfers without evidence of the individual having received professional advice
  • Advisers must conduct a detailed analysis of the client’s circumstances before recommending a transfer

He then goes on to list the steps a pension adviser should follow:

  • Disclosure – explaining the services that will be provided and the costs of these services, and this must be done at the start of the process. Here it is important that the firm clearly sets out whether it will offer independent or restricted advice, and if it offers restricted advice, the nature of the restriction must be explained. Mr Goold added that some advisers will only charge a fee if a transfer is completed, and that once again, this needs to be explained at the start of the process
  • Asking detailed questions about the client’s financial situation – for example about:
  • Level of investment experience
  • Tax position
  • Attitude to risk
  • Capacity for loss
  • Marital status
  • Health
  • Income and expenditure levels (both now and in retirement)
  • Target retirement income
  • Whether there is a need to provide for a spouse and/or dependants in retirement
  • Likely retirement age
  • Explaining the risks and benefits of transferring out, such as that a defined benefit scheme provides a guaranteed level of income, and that anyone who transfers out may risk running out of money at some stage of their retirement
  • Research – this is where the adviser compares the defined benefit scheme and any scheme they are considering recommending. Key issues here include:
  • The death benefits available (unless the client has no spouse or dependants to leave their pension to)
  • How much income is guaranteed
  • The options regarding tax free cash
  • Whether early retirement is an option
  • What level of investment performance would the new pension arrangement need to achieve to match the benefits of the defined benefit scheme
  • Suitability report – a letter setting out what has been recommended and why, personalised to the client’s circumstances. Mr Goold said the FCA had seen firms writing letters which simply listed a series of options and asked the client to choose between them, and he highlighted that this is not acceptable, and the letter must provide a clear recommendation. The risks and benefits of the transfer should be explained in the report in a balanced way, such as explaining that the client is giving up a guaranteed income for life. Since late last year, firms have been obliged to issue this report even where no transfer is recommendation
  • Informing the client of the ongoing service they can expect, such as annual reviews, and how much this service will cost. An important consideration here might be whether the firm will advise the client as to how much income they should draw down each year. The firm needs to make sure it delivers the ongoing service it has promised.

Mr Goold then encourages anyone who thinks that any of these steps were not followed to complain via the Financial Ombudsman Service.

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article