FCA Warns on Pensions Transfer Advice

More than 160,000 savers have been told to transfer out of their defined benefit pension scheme, losing valuable guaranteed benefits

Holly Black 19 June, 2019 | 10:31AM
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The Financial Conduct Authority is concerned at the number of savers being advised to transfer out of defined benefit pension schemes.

Its research into the state of the DB transfer market found a staggering 68% of those who had received advice had been told to transfer out of their pension scheme.

In total pensions worth some £82.8 billion have been transferred out of DB schemes – an average of £352,303 per transfer.

Since the introduction of pension freedoms in 2015, savers have been able to have more control over their retirement savings. But there are widespread concerns that consumers may be missing out on generous benefits by moving their money out of old workplace schemes.

The FCA said: “Deciding whether to transfer out of a DB scheme is one of the most complex financial decisions a consumer may have to make and it is vital that customers get high quality advice. Our ambition is for pension transfer advice to reach the same standard as that of the rest of the financial advice market.” 

Defined benefit schemes are a type of pension plan whereby the amount you receive in retirement is related to your salary and the number of years to contributed to the scheme. Crucially, they guarantee an income for life. 

This is different from the defined contribution (DC) pension schemes which are far more common today. The amount you receive in retirement from these pots depends on how your money has grown based on the performance of your investments over the years you have saved. 

Upon reaching retirement age, consumers can either use their DC pot to buy an annuity (a set income for life in exchange for their savings) or to keep their money invested and draw down income as they require. The danger with this last option is that the money could run out if it is not effectively managed or if they have not saved enough. 

Seeking Professional Advice

Because the benefits of DB schemes are so generous, the FCA has ruled that individuals must take professional advice if they want to transfer out of the scheme, to ensure they understand what they will be missing out on. 

In some cases – where someone has only saved into a scheme for a very short time, for example – a transfer out of the scheme makes sense. But the FCA said any financial adviser determining whether a transfer out is appropriate “should start from the position that a transfer is not suitable”. 

An FCA spokesman said: “It is deeply concerning and disappointing to see that transfers are still being recommended at the levels we have seen.” 

Some 234,951 savers have received advice on transferring their defined benefit (DB) pension. Of these 162,047 were recommended to transfer out of their scheme. The regulator said much of the advice being given is still not of an acceptable standard and that transfers are likely to be unsuitable for most clients.

Tom Selby, senior analyst at AJ Bell, said part of the problem is that a combination of pension freedoms, concerns over pension scheme deficits and record low gilt yields meaning that annuity rates are low, have created an environment where pension transfers have looked attractive to many people. 

He added: "The fact a majority of people who take DB transfer advice are being advised to give up their valuable guaranteed benefits is understandably a cause of concern for the regulator." 

"Regulated Introducers"

In its study, the FCA surveyed 3,015 advice firms between April 2015 and September 2018. Of these, 2,426 had provided advice on DB pension transfers to 234,951 clients. Some 1,454 firms had recommended a transfer to 75% or more of their clients. 

Steve Webb, director of policy at Royal London, said: "Good advisers are rigorously screening out people who should not transfer and make clear the advantages of staying in a DB scheme. But some are relying on regulated introducers to drum up business and seem to be leaning much too far towards recommending transfers. The sooner that action is taken against those who are not doing a proper job, the more confidence consumers can have when they seek transfer advice." 

The regulator has started visiting some firms, starting with those which are most active in the DB transfer market, to complete a full assessment of the approach being taken and advice being given. It will also write to all firms where the potential for harm has been identified by the data that has been supplied. 


The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Holly Black  is Senior Editor, Morningstar.co.uk


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