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Defined benefit pension transfer process explained

The video will be helpful for those who have transferred out of their defined benefit pension and are unclear whether they received good quality advice – including former members of the British Steel Pension Scheme. It will also be of interest to those who are considering transferring out of a defined benefit pension scheme and want to understand what the process should look like before they start.

Transcript for FCA Explains video
Our expectation of financial advisers when advising you on pension
transfers

Slide 1
My name is Mark Goold and I work for the Communications Division of the
Financial Conduct Authority.

I want to talk about our expectations of financial advisers when they provide
pension transfer advice.

Slide 2
The first thing to say is that our message to the advisers we regulate is and
always has been very clear. That message is that it will generally not be in a
client’s best interests to leave a pension scheme that will provide them with a
guaranteed and sustainable income when they retire.

There are some very specific occasions where it may be a good idea but the
key word here is specific – it does depend very much on your own individual
circumstances – so for example, your background, your family situation, your
financial position and lots of other things.

Slide 3
Therefore we expect financial advisers to carry out a detailed analysis of your
personal circumstances before making any recommendation to leave a pension
scheme and it’s this detailed analysis I want to talk about.

Slide 4
This analysis would normally be known as the ‘advice process’. In other words,
we would expect advisers should follow certain steps, ask certain questions
and provide specific documentation when reviewing your personal situation
and recommending something to you.

Slide 5
These steps generally should be carried out in the order you see them on the
screen – this list isn’t exhaustive but in most cases this order should be
followed.

So we would expect advisers to talk to you about disclosure – this is where
they will tell you about the services they offer and the cost of these services.
We’d expect advisers to ask lots of questions about your personal situation
and then carry out research.

We’d also expect advisers to provide you with a suitability report where they
will tell you what their recommendation is and explain the reasoning behind
that recommendation and talk about the importance of ongoing services.

I’m going to talk through each of these areas in turn and describe what should
have happened when you were dealing with a financial adviser.

Slide 6
All we would like you to do is to consider if these steps were covered in detail
with you. If you that wasn’t your experience, or you’re not sure if the advice
you received was suitable then you can contact the Financial Ombudsman
Service and please look at their website for further details and the process to
follow.

Slide 7
Disclosure should be the start of the advice process. In other words the adviser
should have provided you with information setting out specifically what type of
firm they are, the services they can and will offer, and the cost of these
services. I just want to reiterate here that you should have received this
information at the start of the process, prior to any advice being given to you.
Let’s look at this information in a bit more depth.

Slide 8
Type of firm – financial advisers can offer independent advice, which means
they can consider products and providers from the whole market, or restricted
advice, which means they are limited to certain products or providers.

The disclosure information you receive should state if the firm are independent
or restricted. And if they only offer restricted advice then the adviser has to
clearly explain what and who they are restricted to.

Services that can and will be delivered. The disclosure information you receive
should be clear about what the adviser will do on your behalf. For example,
some advisers may provide advice on every part of your financial life. Whereas
others may just consider and focus on your pension scheme.

Many advisers may also offer ongoing service. These services vary but often
include a regular meeting and review of your investments. We will talk about
this shortly but if a firm offers an ongoing service, then again, they have to
clearly explain what that service will look like and how much it will cost in the
disclosure information provided.

One very important point here – some advisers may not have the necessary
qualifications to advise on pension transfers, so they may outsource this work
to another firm which does. If that’s the way the adviser operates, then they
should make you aware of that.

Slide 9
Cost of these services – it’s really important to understand what fees and
charges you will pay for advice and when you will be expected to pay.
Financial advisers have to tell you upfront how much their services will cost in
pounds and pence. This means that you will know how much the advice will
cost you before any work taking place. And it gives you the opportunity to
decide if the services are affordable to you.

Finally, some advisers will only charge a fee if a pension transfer actually takes
place, and again, if that’s the way they operate, then they should make you
aware of that.

Slide 10
The next part of the advice process is called ‘know your client’ or factfinding.
Now this is arguably the most important part of the process as an adviser
should be asking lots of questions around your specific situation.

The answers to these questions will dictate whether it’s suitable and
appropriate to leave a pension scheme.

The approach I would like to take here is to highlight some of the key areas
you should have been asked about. Now obviously the answers to these
questions will be personal to you but as I mentioned before, consider if you
were asked about these areas and the answers that you gave.

We can split factfinding into 3 broad areas:
personal circumstances
risk profile
objectives and needs

Let’s start with personal circumstances. In general terms you should have
been asked about the following:

marital status / family details
health
your knowledge and experience of investing money
tax position
income/expenditure – not just what they are at the moment but what
they both might look like in retirement

other pension plans you have including state pension entitlement
assets/ liabilities
planned retirement date
possible inheritances

Now this list isn’t exhaustive but this basic level of information should have
been obtained by the adviser and, where appropriate, gone into in more depth.
So for example, if you have indicated you have some health issues, then the
adviser should be asking for more detail on the extent of that issue.

In your experience, did this happen?

Slide 11
Also as part of the factfinding process, the adviser should have discussed how
you feel about risk. They may have called this your attitude to risk.

There should have been a discussion on this or perhaps you were asked to fill
in a questionnaire.

As a result of this exercise, the adviser should have established:
• How much risk do you want to take – in other words how do you feel
about investing your money into something where there may be financial
gain but there is also a chance you may lose some or all of your pension
fund.

• But it’s not just about how you feel. How much risk are you able to take?
So for example could you still pay your bills in retirement if you lost
some or all of your pension fund?

• And what about the level of risk you need to take? you may have certain
goals or plans for retirement that can only achieved if you invest your
money in a certain way.

• And finally, what about the general risks of transferring out of an
employer’s scheme? So again, for example, did the adviser explain the
risks and benefits of moving to a new pension plan?

Did they explain that the employer scheme provides a guaranteed income in
retirement – is that important to you?

Did they explain that, if you transfer, you may run out of money. You may live
longer than your pension does – how would you feel about that?

Slide 12
Finally, as part of the factfinding exercise, the adviser should establish your
needs and objectives.

The aim of establishing your needs and objectives is to understand what your
priorities are and what are your plans for the future.

It’s unusual, but some people’s needs and objectives may be perfectly aligned
– so what they want to do is also what they need to do. But that is unusual.
On most occasions there will be some differences between the two, and that’s
where the financial adviser comes in. We would expect the adviser to
accurately identify your needs alongside your objectives, prioritise each
element and build their recommendation around that.

So for example, your objective may be that you want more control over your
pension money or your objective may be that you want to be able to get your
hands on your pension money earlier. Nothing wrong with that but we would
expect an adviser to use their expertise and weigh up the pros and cons
They also have to think about your needs in retirement which will usually
involve paying bills and looking after your family. Having more control over
your pension money may be important to you but if you have to transfer your
pension fund to enable you to do it, it may impact on your family and lifestyle.
To give you some examples of the needs we would expect an adviser to take
into account:

• Income – how much income do you need in retirement?
• Liabilities – what about bills, rent, mortgage, council tax, gas/electricity,
food bills etc?
• Dependants – fairly self-explanatory, do you need to make any provision
for dependants when you retire?
• Timing – when can and when do you need to access your pension
money?

So to summarise factfinding, we would expect a financial adviser to pull all of
this information together around your personal circumstances, your views on
risk, and your needs and objectives and establish the most beneficial outcome
for you.

Slide 13
The next part of the process is called research. So the adviser takes all of the
information they have gathered about you and starts to consider the options
that are open.

At this point we would also expect advisers to carry out a detailed comparison
of the benefits available in the employers’ pension scheme against the benefits
available in any proposed new arrangements.

This detailed comparison needs to look at the following:
• What are the death benefits available within the employers’ pension
scheme against what are the death benefits available in any proposed
new arrangement?
• Income levels available: the employers’ pension scheme will deliver
guaranteed income but will any new plan deliver that?
• Tax-free cash available: how much tax-free cash is available in the
employers’ pension scheme and how much tax-free cash would be
available in any proposed new plan?
• If you want to retire early, will the employer scheme allow you to do
that?
• Income sustainability: the employers’ pension scheme will provide a
guaranteed income for life. Would any new pension plan deliver that?
• Flexibility of existing and proposed new plan. The employers’ pension
scheme will manage your money on your behalf. Is that what you want
or do you want more control over your pension money? Would any new
pension plan give you that control?
• Research also has to consider where the money is going if a pension
transfer takes place. So the adviser has to think about the type of fund
the money will be invested in, the type of product that the money will go
into and who will be the provider of that product. Research has to
consider all of these things.

Following this comparison, a ‘transfer analysis’ should be prepared. The rules
on this have changed since October 2018 but generally the analysis should
illustrate the cost of replacing the benefits that are being given up if you leave
your employer’s pension scheme. In other words, how much money would any
new plan have to make to match being in the employer’s scheme.

It’s really important to point out that we wouldn’t necessarily something we
would expect you to be involved in the research process. This is about the
adviser assessing what they know about you, reviewing the market, and then
coming up with a suitable recommendation, coming up with whatever is in
your best interest.

Slide 14
What we would expect though is that the adviser communicates their findings
and recommendation to you and if the advice is to leave your employer’s
scheme and transfer to a new scheme, you should have received what we call
a ‘suitability report’.

Again the rules here have changed slightly since October 2018 in that a report
needs to be given regardless of whether the recommendation is to transfer or
not.

In simple terms, this report should explain the recommendation, how the
adviser has arrived at that decision, and why it’s the right thing to do based on
your personal circumstances.

There are some clear guidelines in terms of what has to be included in this
report.
Your needs and objectives must be in here: the report must be personalised.
We have seen situations where advisers have regularly used the same report
for different clients and just changed the client’s name. That’s not what we are
looking for.

Slide 15
The report must contain a clear recommendation. Advisers should not give you
a list of options and then ask you to choose – again, something we have seen.
As with all recommendations, there will be advantages and disadvantages and
we expect advisers to present them to you in a balanced way. We have seen
some advisers overplaying the merits of transferring out to get better death
benefits for the client and when we’ve looked at the client’s situation, they
have no spouse nor dependents to leave this money to, so it’s been a pointless
exercise.

The fourth point: this is the transfer analysis I talked about earlier. The report
must clearly state that you’ll be losing a guaranteed income for life if the advice is to leave your employer’s pension scheme and transfer to a flexible or income drawdown plan.

Other material information should be given particularly if the advice is to leave
your employer’s pension scheme and transfer to an income drawdown plan.

Risk warnings must be given and should explain:
• the capital value of the fund may be eroded
• the investment returns may be less than those shown
• the levels of income provided may not be sustainable, so in other words
your pension fund may run out
• there may be tax implications
In summary, the report should help you decide whether to accept or decline
the advice.

Slide 16
As I mentioned earlier, many firms will also offer what is called ‘ongoing
services’.

For example, this could be an annual review to check the value of your
investments and consider any changes to your circumstances. These services
are important, particularly if the advice was to leave your employer’s pension
scheme and transfer to an income drawdown plan.

The adviser should explain the importance of regularly reviewing the income
you are taking from this drawdown plan because you may take too much and
your pension fund may run out.

You don’t have to use an ongoing service when it is offered but if you have no
experience of managing investments, then the option should have been
seriously considered.

If a firm offers an ongoing service then they have to clearly explain at outset
what that service will look like and how much it will cost and the adviser
should also make you aware that you can cancel this service at any time. If
you signed up for an ongoing service, are you actually receiving that service,
are you getting what you paid for?

Slide 17
So in summary, it’s really important to point out that we are not suggesting for
one minute that you have all received poor or unsuitable advice. We just want
you think about this advice process. Were these steps covered in detail with
you, the steps I have been talking about during this video. If that wasn’t your
experience, or you’re not sure if the advice you received was suitable, then
you can speak to the Financial Ombudsman Service.

Slide 18
As I said right at the beginning, our message to the advisers that we regulate
is that generally it will not be in a client’s best interests to leave a pension
scheme that will provide them with a guaranteed and sustainable income when
they retire.

Originall posted by the FCA here – https://www.fca.org.uk/news/news-stories/fca-publishes-video-help-consumers-understand-pension-transfer-advice

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Defined benefit pension transfer process explained
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