LCP Partner David Fairs, until recently Executive Director of Regulatory Policy at the Pensions Regulator, has called for rule changes to allow more people to benefit from ‘freedom and choice’ in pensions.
In his new blog, published today by LCP, David Fairs points out that whilst those with DC pensions have been able to benefit from greater flexibility since 2015, there are barriers to those with DB pensions enjoying the same flexibility. Under ‘pension freedoms’ legislation, anyone with a DB pension worth more than £30,000 is required to seek specialist financial advice before they can transfer their pension rights into a flexible DC arrangement. But in recent years the supply of high quality advice has diminished and the cost of advice has soared, partly as advisers have faced rapidly increasing costs, including securing professional indemnity insurance.
As a result, members with more modest pots – for example in the range £30k-£70k – have found it difficult to source cost-effective advice, with some people being quoted thousands of pounds for advice on transferring a £35k pot. In addition, individual DB scheme members are at risk of falling prey to scammers when transferring money, and can find it hard to discern who is a good financial adviser and who might be out to take advantage of them. They may also struggle to compare costs when advice firms have very different charging models.
In response, David Fairs highlights two potential solutions, the second of which would require legislative change:
– For more DB schemes to appoint a nominated firm of suitably qualified transfer advisers who members can use with confidence that ‘due diligence’ has been undertaken on the firm; even if the scheme only covers the set-up costs of the new advice arrangement, members will generally then pay far less for advice than if they source their own advice from a ‘high street IFA’;
– A change in the rules to allow people with modest DB pots to access drawdown under the umbrella of their DB arrangement either directly or via a carefully chosen third party such as a mainstream drawdown provider or (in due course) a CDC vehicle. The obligation to take regulated financial advice would be lifted where the option was within the same umbrella DB arrangement, but guidance would still be provided. Trustees could be required to ensure that any third party provider was authorised, that any investment options were appropriate and that charges were fair. This would to some extent mirror the duties which trustees are already under when it comes to vetting potential transfers under the latest anti-scam rules. From the member perspective, this would be a much smoother process than transferring out of the Trust altogether and having to source full financial advice, but would still provide good protections for the member against being scammed or selecting an unsuitable or high cost product;
David Fairs said:“The current requirement on members to seek Financial Advice if their benefit is over £30,000, the transfer regulations and requirements to flag amber or red transfer requests and referral to MoneyHelper are sticking plasters on an ineffective process. It would be much better to start with a fresh look at the outcomes desired and design a process to get there. For members to put themselves through such a tortuous and expensive process clearly demonstrates that there is a need for flexibility beyond that currently offered by DB schemes”.