The Financial Conduct Authority is concerned that financial advisers are recommending pension transfers that may not be in the individual’s best interest.
As part of a review of defined benefit pension transfers, the regulator has found that recommendations to transfer were inappropriate in more than half of the cases it examined.
Over the past 12 months, the FCA says the number of people seeking to transfer out of defined benefit pension schemes – which pay a guaranteed income for life related to salary – has soared.
Scheme members are being drawn by high transfer values and the ability to spend their cashed in pension as they wish, following the introduction of the pension freedoms in April 2015.
How much members can expect from cashing in a defined benefit pension varies according to the scheme and the age of the individual. According to research from Drewberry Wealth, the median is 30 times the annual income paid by the pension, the lowest it has reported is a multiple of 11 and the highest 54.
Where transfer values are worth more than £30,000, scheme members must seek advice from an independent financial adviser before they can proceed with a transfer.
Since October 2015, the FCA has reviewed 88 cases where there was a recommendation to transfer. Of these it found that only 17% were suitable, 47% were unsuitable and in 36% of cases it was unclear whether the recommendation was suitable or not.
In particular the regulator highlighted a failure to obtain sufficient information about their clients’ needs, circumstances and objectives. In some cases, advisers did not sufficiently assess the risk their client was willing to take with their pension income either.
The FCA has said it will take these findings into account when its responds to its consultation on defined benefit transfers and will conduct further assessments on firms conducting offering advice in this area.
‘As financial planners, we should not be order takers’
Gary Smith, a chartered financial planner at Tilney Financial Planning says it’s important that advisers don’t just bow to the wishes of their clients who may be drawn to a sizeable lump sum.
“The findings of the FCA review are disappointing, especially at a time when we are seeing an increasing demand for advice in this area,” he says. “As financial planners, we should not be ‘order takers’. Despite a clients’ desire to transfer out of their defined benefit pension arrangements, we should only recommend this course of action if it is in their best interest to do so and if, following the transfer, their objectives can still be achieved.
He adds: “Too often, the individuals’ capacity for loss and attitude to risk are not given sufficient consideration, as these factors would, in most instances, provide a clear indication as to whether transferring out should be even considered.”
Nathan Long, senior pensions analyst at Hargreaves Lansdown, says transferring out of a pension that pays a guaranteed income is not a decision that should be taken lightly.
“The starting point for anyone with a defined benefit pension should be to assume it is best left as it is,” he says. “Transferring means giving up a promised income in return for the uncertainties of investing in the stock market. Transferring away could be investigated further if you are in poor health, are single or have concerns about the employer that provides your pension.”
He adds: “These types of pension transfer are very complicated and require very specialist advice. If you want to investigate a transfer further seek out an experienced adviser.”