Advice firms recommend £20.1bn to be transferred from gold-plated pensions

PA

Firms offering pension transfer advice recommended a total of £20.1 billion be moved out of gold-plated pots between October 2018 and March 2020, according to figures from the City regulator.

And £10.2 billion of the of £30.3 billion advised on in total was in pots where the recommendation was not to transfer.

The Financial Conduct Authority (FCA) published the figures looking into the defined benefits (DB) pension advice market.

  • When a recommendation was made to transfer, £405,178

  • When the recommendation was not to transfer, £267,814

The average pension value advised on was £336,496. The average value where clients were advised to transfer was higher, at £405,178, compared with £267,814 for those advised not to transfer.

DB schemes, such as final salary pensions, are often described as gold-plated as they are prized for promising pension savers a certain level of income in retirement.

They have become more thin on the ground over the years due to the costs involved.

The FCA said it continues to believe that for the majority of people it is not in their interest to transfer out of a DB pension.

Between October 2018 and March 2020, 69% of firms providing transfer advice recommended 75% or more of their clients to transfer.

Contingent charging – where advisers only get paid if a transfer proceeds – was used by 60% of firms during the 18-month period. The FCA banned the use of contingent charging from October 1 2020, reducing firms’ incentive to recommend a transfer.

Following FCA action in 2020, 130 firms stopped providing DB transfer advice.

The proportion of pension scheme members being recommended to transfer following advice has fallen from an average of 69% in October 2018 to 57% in March 2020.

The FCA said the fall in conversion rates indicates that firms are starting to act more in line with its expectation and messages.

Tom Selby, senior analyst at AJ Bell, said: “Even before the FCA banned contingent charging in October last year, the proportion of people advised to swap their guaranteed DB pension for a defined contribution (DC) alternative had fallen significantly.

“From the regulator’s perspective this is viewed as a positive development as it continues to believe such transfers are unlikely to be in people’s best interests.

“Of course the other side of the coin is that, with the size of the DB transfer advice market shrinking dramatically in the face of tougher regulation and rising professional indemnity costs, many people who would benefit from advice simply cannot access it.

“And where someone would be better off switching from a DB to a DC scheme – for example, because the death benefits are more favourable – if they cannot speak to an adviser they risk being stranded in a sub-optimal financial position.”

The FCA, which is clamping down on consumer harm in the investments market generally, also said nearly one in 10 applications from people and firms for authorisation to enter the consumer investments market have failed to get over the line in recent months.

The regulator said applications from 343 financial services firms and individuals between January 1 2020 and October 31 2020 were stopped, equating to nearly one in 10 applications.

Four firms had their application rejected, and a further 339 firms and people withdrew and could not show that they could meet the standards required, the FCA said.

During the 10-month period, the FCA received more than 24,000 reports of unauthorised activity and published over 1,000 consumer alerts – an 82% increase on the previous year.

The regulator also said firms should make sure that the permissions they already have to operate match their current business models.

Where firms’ business models no longer do so, the FCA said they must let it know or they could risk losing their market access.

Sheldon Mills, executive director of consumers and competition at the FCA, said: “Incorrect or out-of-date permissions increase the risk of harm to consumers as they can mislead consumers about the level of protection offered or give credibility to unregulated activities.

“This is why we’re today calling on firms to review their permissions and ensure they reflect current business models. We will take action where we consider out-of-date permissions may cause harm to consumers.

“The message is clear: use it or lose it.”

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