The pension transfer advice conundrum

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The pension freedoms have reshaped the UK’s retirement landscape and opened up a plethora of retirement planning opportunities and risks. The reforms, introduced in April 2015, have proved hugely popular, with savers accessing billions of pounds flexibly and annuity sales plummeting.

However, while the majority of those over the age of 55 in personal pensions like SIPPs have been able to access their savings relatively stress-free, the same cannot be said for people with guaranteed pensions.

Do I have to take advice? 

Under rules imposed by the Government to accompany the freedoms, savers with guaranteed pensions worth £30,000 or more are required to pay for regulated financial advice before moving their pot to a personal pension.

In this case, “guaranteed” means either defined benefit (also sometimes called “final salary”) pensions where your employer pays you a pension based on how much you earn and your years of service, or policies with built in “guaranteed annuity rates”, or GARs. Note that if you are in most public sector defined benefit schemes you are not allowed to transfer your pension to access the freedoms.

The imposition of this advice requirement has caused huge and, frankly, understandable frustration for savers desperate to access their cash flexibly. Why, many ask, should I pay hundreds of pounds to an adviser when I know exactly what I want to do?

Why the barrier?

So why have policymakers placed such a hurdle in the way of savers attempting to exit their guaranteed pensions?

The reason is that guaranteed pensions are extremely valuable (if sometimes  less flexible), and the Government and FCA, the City watchdog, want to ensure you are fully aware of what you’re giving up before transferring.

While this sticks in the craw for many savvy investors, even those paying for advice can find their path blocked. Plenty of advisers won’t touch this business with a bargepole for fear of being hit with a future compensation claim through the Financial Ombudsman Service.

And  if you find an adviser with the necessary qualifications to provide pensions transfer advice, it’s very possible you’ll end up paying for them to tell you not to move your money. 

If you still want to proceed with a transfer, you become what is known in the industry as an “insistent client” – someone who wants to give up their DB rights despite the adviser saying you shouldn’t. In this case, many pension providers simply won’t accept your business.

Should it stay or should it go?

Like it or not, the Government probably won’t budge on the advice requirement anytime soon. While it is a source of intense annoyance for thousands of people who want to take advantage of the retirement freedoms, guaranteed pensions are hugely valuable and shouldn’t be given up lightly.

There is no doubt mandating advice on such transfers jars with the idea of pension freedom and trusting savers with their own money. But given the sums of money at stake, getting the opinion of a good quality financial adviser will, for most people in this situation, be a worthwhile investment.