Last month the FCA announced that it would be making changes to Defined Benefit (DB) scheme transfers.
From 1 October this year, a ban on contingent charging will come into force, effectively replaced by abridged – and lower-cost – advice. There will also be more stringent rules around receiving schemes that can be considered for a transfer, with advisers demonstrating that they have looked at suitable workplace schemes.
The FCA states the changes are to protect consumers but they could lead to less freedom of choice when deciding on your investment.
What are the changes? Why have they been brought in? And what do they mean for you?
Contingent charging ban
The first change is a ban on contingent charging.
Contingent charging is when you receive advice on a potential DB transfer but only pay for that advice if the transfer goes ahead.
The FCA report states that banning contingent charging will reduce what it sees as a conflict of interest.
Exemptions will apply in a small number of cases, for those suffering from serious ill-health, for example, but the FCA expects the ban to significantly reduce the number of DB transfers.
For the small number of cases that do transfer, the charge levied for the advice received must be the same as if the advice was non-contingent.
The abridged advice, offered as a lower-cost option, can only result in a recommendation not to transfer, or a statement that it is ‘unclear’ if a transfer is appropriate.
This blanket approach suggests that transferring from a DB scheme is – in all but very limited circumstances – not in your best interest. At Fingerprint, we would look to adopt a more measured approach, considering a transfer’s merits on a case by case basis, and taking your individual circumstances into account.
Transfers to workplace pension schemes
As part of the new rules, if you request a DB transfer, your adviser must consider a workplace pension as a receiving scheme for the transfer. If an alternative solution is recommended, the adviser must also demonstrate why that alternative is more suitable.
The FCA confirms this change is being brought in because a move to a workplace pension scheme ‘reduces the need for, and costs of, ongoing advice.’
It also, however, prevents you benefiting from the value of that advice.
At Fingerprint, we understand that every client is different and that there is no guarantee a workplace pension will be right for you. We might be able to suggest a better alternative, but only if all options are on the table.
Will the changes benefit you?
A DB transfer won’t be the right option for everyone, but neither will a workplace pension.
Not only is a workplace pension provider highly unlikely to conduct annual reviews, but the scheme on offer might not fit into your long-term plan.
At Fingerprint, we conduct an annual review for all our clients. By sitting down with you and piecing together a financial strategy based specifically on your goals for the future, we can recommend the best investments and products for you.
Having matched your investments to your income and risk profile, your annual review gives you peace of mind that your investments are still on track. And by informing us of any life events or changes to your aspirations, we can ensure your investments continue to be the right ones, even if your circumstances change.
When they come into force in October, the FCA’s changes run the risk of limiting your investment choice.
It’s also possible that some investors looking to transfer away from their DB-scheme after 1 October, might struggle to find an adviser willing to offer that advice.
According to a recent Prudential poll, as reported in FTAdviser, ‘58% of advisers expect to do less or stop doing DB business altogether’ when the changes come into effect.
This restricts your investment choice and threatens to limit the options open to you. If you would like to discuss the possibility of a transfer out before the new rules come into force get in touch. We can offer professional advice tailored to your needs.
Why receiving good advice matters
At Fingerprint, we understand the value of good advice.
In December 2019, the International Longevity Centre (ILC) released an updated version of their own 2017 report into the value of financial advice. That report looked to quantify the increase in wealth investors could expect if they took financial advice, compared to not taking it.
The results were clear. The report found that those who received professional financial advice between 2001 and 2006 were on average nearly £48,000 better off by 2014/16 than those who didn’t.
The report also confirmed that regular meetings can provide better financial outcomes.
Those who received advice more than once – in this case at both points in the analysis (around eight to ten years apart) – had on average nearly 50% higher pension wealth than those who only visited their adviser at the start of the process.
Get in touch
At Fingerprint, we don’t believe in a ‘one-size-fits-all’ approach. We believe that by getting to know you we stand the best chance of building a financial plan that closely aligns with your long-term goals and aspirations.
By taking your circumstances into account, we can help you decide on the right option for you, and that might include a DB transfer.