A major trend in pensions in 2017 was for tens of thousands of members of defined benefit pension schemes to trade in their benefits for a large cash lump sum.
This trend is likely to continue in 2018 and doubtless some Prospect members will be tempted to look into this option.
I have written about the issues involved before; this time I want to focus on some of the main potential pitfalls and problems with advisors that Prospect members should be aware of.
A lot of recent coverage about the issue of taking transfers from defined benefit pension schemes has been in relation to the British Steel Pension Scheme (BSPS).
Of course there are many excellent advisers out there who give professional advice that is in their clients’ interests; this blog is about helping Prospect members spot the exceptions.
1. How widespread is the problem of bad advice?
Last October the regulator (the Financial Conduct Authority – the FCA) published information that indicated that only 47% of recommendations to take cash transfers from defined benefit pension schemes were clearly suitable.
A significant number of advisers working with BSPS have been told by the FCA, or voluntarily agreed, to stop offering defined benefit transfer advice.
A committee of MPs have weighed in on this issue and are likely to publish a report outlining problems with advice and regulatory failings soon.
2. Beware advisers bearing gifts!
The MPs’ investigation into BSPS transfer advice descended into farce over an argument about whether scheme members were served chicken or sausages at meetings to introduce them to advisors.
The wider point is that the issues involved with transferring defined benefit pension rights are far too important to be swayed by someone offering chicken in a basket (or sausages).
3. It is better for you to find them than vice versa!
In general you should be wary of advisors who chase business in customers’ workplaces rather than wait for customers to approach them.
There are firms of advisors drumming up pension transfer business by visiting Prospect workplaces where they know there are lots of members with generous defined benefit pension entitlements that might generate fat transfer fees.
The author of this report looked into this type of advice and found, for example, that their materials had “around seven pages explaining the possible perks of transferring out, including high values, flexibility and tax savings. However, a mere four bullet points towards the back of the brochure explain why somebody might choose to stay in their DB scheme.”
4. What are the advisers’ incentives?
Many advisors charge on a “contingent fee” basis. A contingent fee is where the adviser is only paid, or is paid significantly more, if a transfer goes ahead. The regulator admits that contingent charging poses a risk of creating a conflict of interest for advisors. You may prefer to find an adviser that charges a fixed fee or a fee based on how long it takes to prepare the advice.
5. How high are the transfer fees?
Whether the fee for advice is a percentage of the transfer value or a fixed fee or based on the time taken to do the work it is obviously important not to be ripped off.
Unbiased.co.uk has information on the fees that are typically charged. Reports of advisers charging BSPS members 3% of the pension pot or more show that it is easy to get ripped off if you do not shop around.
6. How appropriate is the vehicle funds are transferred to?
It is important to look at the charge associated with the investment vehicle any lump sum is transferred to as well as the charges for the transfer itself.
It is equally important to know how your cash is going to be invested. This blog describes the concerns an expert had with a vehicle many BSPS members transferred their cash to.
Even more seriously, the regulator has this warning about frauds and scams.