Mutual insurer Royal London has today made a number of recommendations designed to improve the current system of financial advice available to consumers considering defined benefit (DB) pension transfers. The recommendations have been sent to the FCA in response to its consultation paper ‘Improving the quality of pension transfer advice’, which closes today (25th May).
To ensure consumers are not deterred by the cost of financial advice, Royal London says that they should be allowed to fund the cost of transfer advice out of their DB pension rights. At present DB schemes can ‘debit’ the rights of members in respect of pension sharing after divorce or to facilitate ‘scheme pays’ pension tax relief charges, and advice costs would be debited in a similar way. This would help members who would like to take advice but may not have the thousands of pounds that could be needed to meet the full cost of transfer advice.
This change has the added benefit of protecting consumers against a potentially perverse outcome. Currently those advised not to transfer may struggle to cover the cost of the advice, and then transfer simply to access their funds to ‘pay the bills’.
On a related issue, the current rule for DB transfer advice is that for rights of £30,000 and above, financial advice is mandatory. As full transfer advice can cost several thousand pounds this can result in taking a large chunk of funds out of a relatively small pension pot. While new and ongoing research is required to examine the cost of transfer advice for smaller DB pensions, we believe that action must be taken now to make it more proportionate. In its submission, Royal London recommends that the limit could be raised to around £50,000. For those with smaller pots, guidance can have an important role to play and for those with DB pots below £50,000, Royal London suggests it should be mandatory to engage with Pension Wise for basic factual information.
There is wider concern that many consumers are accessing financial guidance and advice too late, often on the eve of retirement. At that stage there is little opportunity to change course, or simply avoid feeling pressured into making a quick decision. Royal London therefore urges the Government deliver its plans for a “mid-life MOT” which for many consumers would see them engage with financial advice and guidance for the first time potentially enabling them to make crucial decisions before it’s too late.
Robin Nimmo, Strategic Marketing Insight Manager at Royal London said:
"High quality, impartial financial advice is essential to those considering transferring out of a defined benefit pension scheme, but not all members will have access to significant amounts of ready cash to meet advice costs. We believe that members should be allowed to set the cost of advice against their DB pension rights, ensuring they are not put off exploring their options by having to pay upfront costs.
With regard to smaller pots, we believe that the current threshold of £30,000 for mandatory advice is too low. Full transfer advice can run into thousands of pounds which for pots that size is disproportionate. We would like to see the limit significantly increased, at least to £50,000.
Guidance also has an important role to play and for those with pots of below £50,ooo it should become compulsory to ensure consumers access the PensionWise service for basic factual information about their options."
- ENDS -
About Royal London:
Royal London is the largest mutual life, pensions and investment company in the UK, with funds under management of £117 billion, 8.8 million policies in force and 3,745 employees. Figures quoted are as at 30 June 2018.