Advisers may struggle to deal with DB transfer demand
The Financial Conduct Authority’s (FCA) move to toughen up defined benefit (DB) transfer regulation was long overdue. However, it may result in more demand for transfer advice than there are advisers qualified to provide it.
Although the 1986 Financial Services Act came into effect in 1988, it took regulators another six years to realise transfers from DB schemes required specialist advice.
The fundamental problem was how to compare a lump sum transfer value payable now with a future income stream payable at retirement or earlier.
Until now, advising on transfers or opt-outs from an occupational pension scheme has been deemed a permitted activity that could only be carried out by a pension transfer specialist.
However, this only relates to transfers to personal pensions, and not to other occupational pension schemes, as rights in an occupational scheme are not an investment under FCA definitions.
Occupational schemes are regulated by the Pensions Regulator (TPR), not the FCA.
There is an exception, with pension transfer specialists not required when the scheme is offering immediate benefits that have been quoted, for example if a sum has been offered.
The logic is that if the scheme was offering £6,000 per annum or a transfer value of £100,000, a competent adviser could immediately compare the alternative benefits available under an annuity or drawdown.
A switch in the rules
The proposed new rules will make transfers to occupational defined contribution schemes a regulated activity by the FCA. This includes safeguarded benefits being transferred or converted into flexible benefits.
Safeguarded benefits include all DB schemes and personal pensions with guaranteed annuity rates.
At present, transferring money from a personal pension, perhaps for reduced costs or to access a wider range of funds, is treated as switching and is not a permitted activity.
Under the new legislation, a transfer for these reasons will still be deemed as switching, but if the switch is from one personal pension to another to access flexible benefits it will be treated as a transfer.
Recognised pension transfer specialists may find they have more enquiries than they can deal with. This is a great problem for them to have, but not so good for customers.
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