If the transferrable value of your DB pension pot has soared recently, the fact that the FCA is expressing concerns about the quality of advice being dispensed should ring a timely alarm bell… By Mark Soper

I last wrote about transfers out of defined benefit (DB) pension schemes a little over three years ago, shortly after the new pension freedoms were announced.

So why are such transfers now under specific FCA scrutiny?

Transferring out of a defined benefit pension scheme that provides a guaranteed level of index-linked pension has always been a hot potato – and rightly so. Such a transaction is normally only right for a few individuals… yet over the last three years the number of transfers and the amount transferred out of defined benefit schemes has soared.

It is not the advent of pension freedoms that has caused this increase in transfer activity – as for the majority of cases the transfer must be recommended by a specialist financial advisor –  but the huge increase in the transfer values being offered.

In a few cases, transfer values have doubled over the last three years and many have increased by at least 20%.  These increases have been driven by the dramatic fall in the long-term gilt yield – yes, we can still blame the credit crunch! In 2008 the 15 year gilt yield rose above 5% and eight years later in 2016 the rate fell below 1.0%.

As a large proportion of a defined pension scheme’s investments will be attributed to Government bonds, the lower gilt yield means that a higher level of fund is needed by the scheme to meet its potential liabilities. In a transfer situation, the guaranteed pension, therefore, attains a much higher capital value when gilt yields are low – and in 2016 they reached rock bottom.

One factor of the advice process that an adviser will define is the rate of return that would be required to match the level of defined pension given up. As a result of the higher transfer values, this rate – called the “critical yield” – has fallen sharply in many cases. This has led to an increase in the number of advisors dispensing advice in this area and also existing advisors reappraising their existing book of potential transfer business.

Nothing wrong with that. But the FCA has found some evidence where generic, rather than individual, advice is being dispensed – and that is not so good.

One instance is the targeting of members of the British Steel Pension Scheme by advisers keen to win clients, and both the FCA and Government are concerned that unsuitable advice is being dispensed.

The FCA has now decided to act more widely, and will be requesting detailed information from all advisors about their transfer activity later this year and there is an increasing risk that some professional indemnity insurers will withdraw or impose tough conditions on advisers trading in this area.

The upshot of all of this is likely to be much higher advice fees for the consumer, and in turn the pricing out of the market for many who wish to at least get some basic advice regarding a transfer. 

So if you are holding a defined pension scheme and looking at your options, the best advice is to look very hard indeed before leaping, as tempting as the sums on offer may appear…and be sure to take independent expert advice.

RetireEasy can help you to visualize the effects of a transfer on your income and assets throughout your retirement.  Go to www.retireeasy.co.uk to learn more.  With RetireEasy LifePlan Premium you can then compare the outcomes of both options.