FCA fee ban to nudge pensioners away from final salary transfers

5 June 2020

Contingent charging to be outlawed from 1 October

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Fewer pensioners will take the risk of needlessly cashing their pots in because the Financial Conduct Authority has banned contingent charges on final salary or defined benefit pension transfers.

The controversial method of charging means pension holders only pay a fee to their financial adviser if a pension transfer is recommended, and will be outlawed from 1 October.

Current rules mean that any individual with a pension transfer value in excess of £30,000 must seek financial advice before they cash their scheme in.

Although contingent charging makes advice more accessible, critics have long argued that it creates a conflict of interest by incentivising advisers to recommend a transfer.

What is the background?

Encouraged by eye-watering transfer values, huge numbers of final salary scheme members have cashed in their pensions since the introduction of new rules in April 2015 that make it easier for retirees manage their income more flexibly.

However, the FCA is concerned that pension transfers are high risk and unlikely to be appropriate for most scheme members because it involves giving up an income that is guaranteed for life.

Commenting on the decision, Christopher Woolard, interim chief executive of the FCA says: "The proportion of customers who have been advised to transfer out of their DB pension is unacceptably high. While much of the advice we looked at was suitable, we are still finding too many cases in which transfers were not in the customer’s best interests.

"Customers need to have confidence that the advice they are receiving is right for them. The steps we are announcing today will drive up standards."

The only exceptions to the ban will be for vulnerable clients who may be in poor health or suffering financial hardship.

Tom Selby, senior analyst at AJ Bell says the move will discourage many people from pursuing pension transfers – some of whom could be better off as a result.

“Banning contingent charging was always a balancing act for the regulator, potentially reducing the number of customers who receive inappropriate advice but at the same time creating the real risk people who could be better off transferring are unable to pay for advice as a result. 

Who are DB transfers right for?

Individuals who may be better off cashing in a final salary pension include those in poor health with a reduced life expectancy and single people who may want to pass their savings on to their children or other loved ones when they die.

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