“Yesterday the Work and Pensions Select Committee launched an inquiry into freedom and choice. One question it raised is whether people are taking appropriate advice, and if not, why not? For those considering a transfer out from DB, there is a need for better quality advice and more certainty around who is ultimately taking responsibility for it.
“This consultation from the FCA, while a welcome step forward, is long overdue. Clarifying the expectations placed on advisers should, over time, increase the number of quality financial advisers operating in the DB to DC transfer market. In turn this should lead to greater confidence in the market resulting in more companies and trustees providing the right level of support to help their members. This would include facilitating financial advice and therefore reducing the significant cost hurdle to accessing advice that currently exists. This would be a big step forward, as many more members would receive good quality advice and therefore make better informed decisions on whether to stay or transfer.
“There is much in the consultation we welcome. Its focus on protecting individuals is crucial. It also clarifies many areas that had become muddied by the new freedoms and starts to reflect the broader retirement landscape. The requirement to provide a personal recommendation given a DB pension is often key to someone’s income for decades is positive. The articulation of advisory responsibilities is also a good thing. In addition there is a helpful recognition that for some transferring from DB to DC could well be the right choice. This could be due to a raft of different reasons such as tax, inheritance planning, family or health reasons.
Commenting on the specifics, he added: “It is vitally important that any advice framework is underpinned by the right analysis. This should include an income needs analysis, to ward off the risk that the individual runs out of income in old age. This would assess the split between guaranteed income to meet essential living and variable income needs above this. It would also look at alternative scenarios of income under a range of investment and life expectancy scenarios so members really understand the risks. We should strongly reject any attempt to hone in to a single number as proposed under the mandatory transfer value comparator (TVC) - that would be a dangerous path to tread with similar failings to the current critical yield transfer value analysis. Any analysis needs to be tailored to the individual to ensure it is relevant to their situation and needs – cash-flow analysis needs to form the bedrock of this.
“With the mandatory introduction of the TVC, if there is no intention of purchasing an annuity, requiring hundreds of pounds to be spent on detailed analysis of the costs of purchasing one seems unhelpful. It also seems to suggest that advisers must ignore both the health status of clients and the likelihood that the majority will choose to take tax free cash, which 9 out of 10 individuals do. A further failing is that the comparison ignores the risk that the DB pension is exposed to sponsor insolvency risk which for some members will be a material consideration – recent high profile DB scheme failures have shown this. It would therefore appear that the TVC neither represents a fair representation of the value of the benefit being given up, nor for most members the benefit they intend to take. It seems unfortunate the FCA feels required to enforce this TVC at all. In some situations it is probably deeply unhelpful and in all cases it will be costly. The industry must approach this with caution.”
Concluding, he said: “It’s vital to have a clear advice framework that supports quality advice reflecting the specifics of each individual. In this regard the proposals are welcome. However, without modification, mandating a TVC could mean that these proposals do not move the advice landscape on quickly enough to support the real and ever increasing need from members.
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