What happens if a client wants to proceed to having full pension transfer or conversion advice?

Regulatory guidance states that the FCA’s expectation is that where abridged advice concludes that a client should stay in their existing defined benefit pension arrangement then in most instances this advice should stay the same – to stay put.

If the outcome of abridged advice was that a firm is unable to take a view and the client proceeds to full transfer advice the FCA’s expectation is that the outcome of full transfer advice may still be to stay with their existing arrangement (stay put).

The role of Pension Transfer Specialist (PTS)

Any abridged advice must be checked by a qualified pension transfer specialist for its completeness.

The specialist must also confirm any personal recommendation is appropriate in accordance with COBs rules specific to checking pension transfer advice.

Finally, written confirmation must be provided by the specialist.

In terms of assessing suitability the starting point (as always) is to assume that a pension transfer or conversion will not be suitable.

Other factors to take into account include:

  • Establishing and analysing the client’s intention for accessing pension benefits. 

A pension is what it says it is – a pension.

That’s to provide income for retirement.

Therefore, a strong rationale must be provided to justify other reasons for accessing funds that are intended for income in retirement.

An intention to double the transferred pot by putting it all on black in a casino is not a rational reason, and would obviously be viewed with disdain by any regulatory checker of such things.

An intention to pay down an outstanding mortgage and/or wanting to take retirement income earlier due to health concerns are, by way of example, favourable intentions.

Once intention is established an exploration of the risks involved must be made and this exploration must factor in a client’s attitude to the risks involved. 

What do I mean by risk?

To start with the risk of giving up the defined benefits offered in a defined benefit pension scheme Vs moving into a money purchase scheme.

Somewhat of a rarity in financial jargon a defined benefit pension is what it’s name suggests – that the benefits you will get are defined.

This is based on how long you worked for an employer, what your salary was at the time of leaving and ‘accrual’ rates.

Whilst a defined benefit pension scheme isn’t completely ‘risk-free’ (it could end up in the pension protection fund), you as the scheme member are protected and unaffected by the ‘day to day’ investment risk and possible volatility. 

Effectively, you don’t have to worry about risk and getting investment returns to pay your income. You also don’t have to worry about the erosive impact of inflation (to a certain degree).

Yes, many defined benefit schemes ‘cap’ their inflation rate (so the maximum they’ll pay) but this is still a lot more useful (especially in a high inflation period) than having no protection at all.

In contrast, once a transfer or conversion has taken place into a money purchase or ‘flexible benefits scheme’ you lose all guarantees of income explained above.

If not more importantly, all investment risk is on your shoulders. This means however much your income requirements are forecast to be – YOU will need to ensure your transferred pension archives the returns necessary to satisfy these income needs.

As well as lasting for as long as you do!

More on this below.

If you are an experienced investor (perhaps with buying and selling investments within an ISA or managing an investment portfolio) and importantly have experience of losses you will be well aware of investing and associated risks.

If, in combination with this, you have ample provision for your income requirements in retirement (which may be from other pensions, investments, buy to lets etc) then obviously you have more ‘capacity’ if your transferred pension or conversion doesn’t perform as expected.

On the other hand, if you do not  have other provisions (or it’s minimal) and on transfer or conversion your main asset will be your new money purchase pension your exposure to risk is significantly more. If your investment decisions turn out to be bad ones and returns are seriously impacted by Charges then you will face considerable risk to your newly transferred funds.

But it’s not all gloomy, so don’t start running to the toilet just yet. You may make superb investment choices and benefit from significant returns.

Charges may be small in comparison to your stellar returns and therefore almost insignificant.

Who knows?

You don’t, I don’t and whoever you’re talking to (however convincingly they are) don’t either.

Coming up next.…..as part of this pension transfer abridged advice series of posts the next part is about death. Something to look forward to then!


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