Watch out for pension-switching pitfalls
The Financial Services Authority (FSA) has criticised pension firms for giving unsuitable advice on pension switching.
A review by the FSA led to a number of firms carrying out past business reviews that will deliver more than £150 million in redress to customers.
The regulator studied the advice given out by firms. Some advisers were found to be offering ‘portfolio advice services', where the additional costs were not justified for a particular customer; the FSA also saw examples of tied advisers not investigating a customer's existing pension
Dan Waters, the FSA's director of conduct risk, says: "The actions we have taken to raise standards have driven significant change in the market and will see large sums of money returned to customers who received poor advice.
"In fact, more than 10% of all pension switching advice since April 2006 (A-Day) will be looked at again as part of the past business reviews firms are carrying out.
"However, although many firms have changed the way they operate, we remain concerned that some continue to give poor advice. Ignorance is no defence and we will continue to focus on the high risk firms through intensive supervision. We will not hesitate to take tough action against any firms that fall below our standards."
Things to consider before switching
If you are thinking about transferring your current pension into a new personal pension or self-invested personal pension (SIPP) you should consider several factors.
Firstly, will the new pension be more expensive than the existing one? If it is, then you need to be sure the extra costs can be justified.
Next, consider whether a stakeholder pension meets your needs and objectives. Stakeholder pensions are usually cheaper than other personal pensions and advisers should discuss them with their clients as a possible option.
You also need to work out whether it’s a wise move to transfer all of your pensions into a single new pension. This plan of action could incur costs which your adviser should be able to explain to you.
Another thing to look at is whether you will lose any benefits, such as death benefits or a guaranteed annuity rate option, by switching.
Some pensions may apply a penalty when you transfer out. These can be significant – running into thousands of pounds – so it’s important to check if one may apply in your case.
It’s also important to look at whether the investments in the new pension are right for the amount of risk you’re happy to take. An adviser can help you decide how much risk you are prepared to accept and can explain the risks and potential benefits of different funds and investments to you.
It’s vital to take professional advice before switching your pension and, depending on what course of action you decide to take, you might benefit from ongoing advice too. To find an IFA in your area click here.
A form of money purchase defined contribution pension launched by the then Labour government in April 2001 with low charges and no-frills minimum standards. Designed to appeal to people on low and middle incomes who wanted to save for retirement but for whom existing pension arrangements were either too expensive or unsuitable, the stakeholder didn’t really take off and looks to be superceded by the National Employee Savings Trust (NEST).
Like a self-select ISA but for pensions, self-invested personal pension is a registered pension plan that gives you a flexible and tax-efficient method of preparing for your retirement. It gives you all sorts of options on how you put money in, how you invest it and how it’s paid out and offers a greater number of investment opportunities than if the fund was managed by a pension company. SIPPs are very flexible and allow investments such as quoted and unquoted shares, investment funds, cash deposits, commercial property and intangible property (i.e. copyrights, royalties, patents or carbon offsets). Not permitted are loans to members or people or companies connected to the SIPP holder, tangible moveable property (with the exception of tradable gold) and residential property.
The Financial Services Authority is an independent non-governmental body, given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives: market confidence (maintaining confidence in the UK financial system), financial stability, consumer protection and the reduction of financial crime. The FSA receives no government funding and is funded entirely by the firms it regulates, but is accountable to the Treasury and, ultimately, parliament.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.