Every member in a private sector defined benefit scheme has the right to request a transfer value at least once a year. This is essentially a calculation of the cash value of the promised retirement income from the scheme.
Interest in transfers from defined benefit schemes has greatly increased since pensions freedom was introduced. The proceeds can now be taken however the member chooses with complete flexibility, making them more popular.
Figures from the FCA show that around 90,000 clients received transfer value advice between October 2018 and March 2020. It is likely that at least as many requested quotes but did not go on to take advice.
Many of these quotations would be for members aged 55 and above, looking at their retirement options.
Transfer values have been growing due to falling interest rates and consultant Lane, Clark and Peacock (LCP) recently showed that average transfer values have now broken the £500,000 barrier, They also estimated that around 21% of those that requested a quotation actually went on to transfer funds.
Specialist independent financial advice is compulsory for all transfers of over £30,000. Members simply cannot transfer without documentation that shows this advice has been provided.
However, with increasing perceived risk and rapidly rising insurance costs, 46% of these specialist advisers have withdrawn from the market in the last year alone. This leaves a reduced pool of specialists able to provide the compulsory advice needed.
Given the increased costs to advisers and the reduction in supply, members have seen the costs for this advice increase.
With the ban on contingent charging last year, where members were only charged if the advice was to transfer, members now, quite rightly, pay the full cost of advice regardless of whether this is to transfer or remain in the scheme. Advice to remain in the scheme is very valuable in its own right, but many members will not view it as such.
Although many advisers will put in place a triage process and abridged advice to determine if full advice is suitable, members ultimately have the risk of paying large sums in advice fees, without having any idea whether they are likely to fall within a category where the FCA is clear that a transfer is highly unlikely to be in their best interests.
A minority of schemes may appoint a selected adviser, or panel of advisers, to directly help members with this process. They may also secure discounted advice rates in doing so.
This clearly provides the best outcome for the member if they are lucky enough to be in a scheme that follows this route.
However, for the vast majority of members considering a transfer value, the process is very different.
It essentially involves being handed a piece of paper, presenting them with the transfer value, which may look potentially life-changing at first sight and the scheme benefits.
They are then instructed that advice is compulsory and are given direction to sites where they may be able to find an adviser or further guidance if needed.
This presents many scheme member with a series of issues which they may have little understanding, or idea on, such as:
- The differences between the scheme’s guaranteed benefits and the transfer value
- How a transfer value is not just a potentially large sum of money, but needs to be used to provide, or support, a retirement income alongside everything they have
- How to find the specialist advice needed from the sites directed to
- What the advice process actually entails
- The likely costs of advice and the need to pay it regardless of the outcome
- The FCA’s viewpoint on who a transfer value is highly unlikely to be suitable for
- Any independent assurance on the quality of the adviser chosen
This is a potentially difficult position for the member. They are left susceptible to poor or unsuitable advice, high costs, or in the very worst of outcomes, falling victim to a scam
Issues for other parties involved
Alongside the risks for members, the trustees bear growing risks in following this process. It is becoming more apparent that members may reach an unsatisfactory outcome given the lack of support provided, especially if unsuitable or overpriced advice is found.
In addition, all experienced specialist defined benefit advisers desire members seeking transfer advice to have some genuine form of pre-education and understanding of the process. Ideally, members will also have some degree of self-awareness of their retirement position and the potential suitability of a transfer for them before seeking advice. Without this, it leads to added risk for advisers in not being able to provide suitable, high-quality advice.
In summary, there are many risks and issues in the current default process for the majority of schemes when dealing with member requested transfer values. These risks are apparent for all parties concerned.
Given the popularity of the pension freedoms, the increasing size of the transfers themselves and the ever decreasing numbers of specialist advisers, these flaws are likely to increase further.
To address this, a safe harbour process, containing free pre-education, member self awareness and suitably experienced adviser direction, before the abridged advice stage is even undertaken, should be adopted by schemes.
Kevin Hollister is founder of Guiide