22nd September 2020
The ban on contingent charging for defined benefit (DB) pension transfers, where financial advisers only get paid if a transfer goes ahead, takes effect from 1 October 2020.
Jonathan Watts-Lay, Director, WEALTH at work comments on the changes;
“Anyone with a DB pension pot valued at over £30,000 has to take advice if they want to transfer but until now, contingent charging meant that some financial advisers would only be paid if a transfer went ahead, which could lead to a potential conflict of interest. From October, contingent charging will be banned on DB transfer advice.
From now on, anyone with a DB pension pot who takes regulated financial advice on transferring out will have to pay the advice fee up front. Whilst this is designed to protect people from being advised to transfer when it isn’t the right path for them, it may also put some people off a DB transfer, when given their personal situation it may be the best thing for them.
It is only through advice that someone will know whether a transfer is appropriate or not, but there are many people who simply may not be able or willing to pay up front. To address this, some employers and pension schemes may consider other options to help people decide if regulated financial advice is needed.
The first is offering financial education and guidance which explains the generic upsides and downsides of DB transfers. These have to be presented in a completely balanced way so as not to influence someone one way or the other.
The second is ‘abridged advice’; a new type of advice where the adviser will look at someone’s attitudes towards risks such as investment, longevity and inflation, but will not carry out any financial analysis. With abridged advice, an adviser can only provide a recommendation to either not transfer, or to inform someone that it’s unclear whether they would benefit from a transfer. What it can’t do is recommend a transfer as this can only be made when paying for full regulated DB transfer advice.”
He adds; “It is concerning, however, that there is no requirement to take ongoing advice once a transfer has been made. Even if a transfer is recommended, unless the transferred money is managed well, there are no guarantees that it will last through retirement.”
He concludes, “It is crucial that people make informed choices when accessing their pension. Financial education and guidance at retirement can help someone to understand their options and avoid any risks, including those associated with DB transfers, such as falling for a scam, buying inappropriate retirement products, paying more tax than necessary and ultimately running out of money. Speak to your employer to find out what support and guidance they offer.”
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*WEALTH at work and my wealth are trading names of Wealth at Work Limited which is a member of the Wealth at Work group of companies.