Reaction as FCA reveals plans for changes on DB transfer advice

The FCA has revealed plans for changes on DB transfer advice this morning, including scrapping guidance that the adviser should start from the assumption that a transfer will be unsuitable. The proposed changes also include requiring transfer advice to be provided as a personal recommendation, and replacing the current transfer value analysis with a comparison to show the value of the benefits being given up.Industry experts have been reacting to the announcement.Rachel Vahey, product technical manager at Nucleus:“Defined benefit transfers are quickly edging to the top of the financial planning agenda, thanks to a heady mix of high transfer values and consumer desire for flexibility. The current regulatory framework is past its sell-by date, and we welcome FCA's consultation on how to update it.“Whatever emerges needs to be a robust system designed for the long-term, not just in response to these extraordinary times. Good financial planning is at the heart of defined benefit transfer advice, but the regulatory framework also needs to be fit for purpose. Updating the transfer value analysis (TVAS) requirements is a necessity to bring it into the 21st century and we welcome the fact the FCA is looking to replace this with something more focussed.“Every person's circumstances are unique and advice has to be tailored for the individual, so it is good to see support for the move to make DB transfer advice a personal recommendation. Regulated advice should reflect the myriad of options shaped by a person's objectives and the current financial planning environment.”Andy Bell, actuary and chief executive of AJ Bell:“The current assumption that defined benefit transfers will be unsuitable, is a view from a bygone era and does not reflect reality. The removal of this starting assumption would therefore a positive development and it is right that advisers should assume a neutral starting position.“With defined benefit pension scheme members who have left the employer being offered multiples of their deferred pension not seen before, many people will see transferring as a sensible option. Extremely high transfer values, poorly funded schemes and the vast improvement in death benefits post transfer are still uppermost in people’s decision to transfer.“Whilst it is good that the consultation will be reviewing the TVAS process, it appears that the proposed transfer value comparator (TVC) shares the same flaw as the current transfer value analysis (TVA). They put annuity rates at their heart, when annuities are wholly irrelevant, unless someone wants to take a transfer value now and then buy an annuity at the point of retirement, which would be perverse.“The analysis needs to reflect the substance of the transaction in hand. Our preference would be to project the income that can be generated from the transfer value from normal retirement age, using sensible growth rates and a standard table of sustainable income drawdown rates and then compare this level of income with that being foregone.”Andrew Tully, pensions technical director, Retirement Advantage:‘Driven by record transfer values, and the opportunities presented by pension freedom, there are a huge number of people looking to transfer out of final salary pensions. The attractions are obvious, but there are pitfalls for the unwary.‘Due to low gilt yields, many transfer values look very attractive at the moment, often with values above 30 times income, well above historic averages. Combined with the extra flexibility offered by the pension freedoms, it is no surprise people are consider moving out of a final salary schemes into drawdown or a combination of drawdown and annuity. This has been an unintended consequence of the pension freedoms, and although clearly not right for everyone, can lead to better outcomes for some people.‘There is a risk people will be driven to transfer because of the ‘snowball effect’ caused by hearing about or knowing many others who are transferring. It’s clearly important each case is judged on its own merits. But neither should people be criticised for trying to get the best outcome for their family.‘The ability to pass unused pension wealth to family is a strong driver for many people, especially when contrasted with the often poor level of death benefits available to those who have a final salary benefit with a previous employer. Similarly, those who are single, widowed or divorced may benefit from the ability to re-shape death benefits to suit their individual circumstances.‘Final salary schemes lack flexibility, so a transfer can allow advisers to help customers control the amount of tax they pay, and gradually ease their way into retirement. When combined with the potential for greater amounts of tax-free cash and possible health issues, there are a range of reasons why a transfer may be worth exploring.‘However, it is important to recognise many people are likely to be better off staying put, despite the obvious attractions which pension freedom offers. A guaranteed lifetime income shouldn’t be snubbed without careful consideration. Although it’s worth remembering alternatives – such as hybrid drawdown contracts - can help customers mitigate risks after transfer‘The need for advice in this area is clear. Many people are looking for help, and there is a danger that demand is greater than the supply of advisers able and willing to get involved. So it is important the regulatory regime doesn’t discourage advisers from helping clients who want to investigate a transfer.’Philip Brown, head of policy at LV= :“The regulator’s proposed changes to pension transfer advice are welcome news for people approaching retirement."Since 2015, there has been a stark rise in the number of people wanting to transfer out of their defined benefit scheme to take advantage of the Freedom and Choice reforms."Therefore it’s vital there are strong safeguards in place to protect people from making choices without first understanding all the risks.“We wholeheartedly agree advice on transfers should be a personal recommendation and strongly support changing how transfer values are presented. These changes should mean people aren’t unduly influenced into giving up valuable benefits and ensure they can have a safe and secure retirement.”Steven Cameron, Pensions Director at Aegon:“Consumer demand for transferring out of defined benefit (DB) schemes has never been higher and in this complex area, customers absolutely need advice. But advisers are currently faced with second guessing what the FCA considers as suitable advice including how to allow for the pension freedoms those in defined contribution (DC) schemes now enjoy.“Against a backdrop of regulatory uncertainty, understandable reluctance from many advisers means the supply of advice is falling far short of demand, creating the risk that many individuals are not getting the support they need to make the right choice. The FCA consultation needs to make the market work for customers, allowing advisers to offer suitable and balanced advice that fully allows for the individual’s circumstances and wishes.“People used to transfer out of DB schemes in the hope of securing a higher retirement income through an annuity but now, their objective is often to access the Government’s pension freedoms which have proved popular with their DC pensioner peers.“If the primary objective is flexibility, advice shouldn’t be based solely on the likelihood the transfer value will secure an annuity at scheme pension age above the DB benefit given up. Advisers quite rightly need to explore wider objectives and the additional value to the individual offered by pension freedoms, such as choosing when to start taking an income, how to shape income year on year and leaving funds to loved ones. This consultation provides the opportunity for the industry and the regulator to reset ‘what good looks like’.“While this is a complex area and can’t be rushed, the FCA’s timeline means final rules won’t be provided until next year. We need to explore if there are interim solutions which can give advisers confidence in the meantime to meet current consumer demand.”

Reaction as FCA reveals plans for changes on DB transfer advice

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