Final Salary Pension Transfer Dilemma For IFAs

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Financial watchdogs are cracking down on recommendations financial advisers are offering retirement savers who want to transfer out of direct benefit pensions.

The Financial Conduct Authority is looking at relaxing the rules for transfers out of DB pensions mainly because they are at odds with new pension freedom regulations.

DB pensions are mainly workplace scheme that are too small to run freedoms like taking cash lump sums from the age of 55.

Many retirement savers want to switch away from their DB final salary pensions because they lock up cash until they are 60 or 65 years old and offer a monthly income instead of taking out more than 25% cash.

Until now, the FCA has considered any move out of a DB fund is not a good outcome for a saver as they are likely to sign away guaranteed income and benefits.

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Pension freedoms

Pension freedoms and DB transfers present a dilemma to advisers, according to a study by pensions giant Prudential, as they are concerned about consumers suing them for losses if they recommend switching out of a DB scheme.

However, the study found 80% of advisers are dealing with an increasing number of requests for advice about moving out of a DB scheme.

Around 40% of consumers are going ahead with transfers even if the adviser disagrees with the move – and half of advisers with these insistent consumers still help with the transfer even if they have recommended against the transaction.

Most advise against a DB transfer because the consumer is giving up guaranteed income for life (61%) or their plans to draw cash will result in unnecessary tax bills (56%).

Others advice firms are more concerned about their own businesses.

Self-protection for advice firms

The study revealed 39% are concerned about the cost of contested advice and 17% worry that their business insurance costs will increase.

Stan Russell, retirement expert at Prudential, said: “Prudential’s research indicates that although the majority of defined benefit scheme members are wary of transfers, interest in transferring final salary pensions schemes has increased markedly over the past four years.

“Relatively high transfer values and the fact that pensions can be left as part of an inheritance are among the main reasons why clients might insist on a transfer, even if it is not in their best interests.

“This presents financial advisers with a dilemma. The valuable benefits of a defined benefit pension should not be given up lightly because it involves transferring investment and longevity risk from the employer to employee and is irreversible once complete.”

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