Pension planning – Defined Benefit transfer advice

What is a DB or Final Salary Pension?

Broadly there are two types of pensions, Defined Contribution (DC) and Defined Benefit (DB).  The former is where you (and often your employer) pay a monthly amount into a pension pot.  The funds are invested and the pension which you can draw in retirement will depend on how much you put in and the growth that you get on the funds.  This is by far the more commonplace and anyone who is currently in employment is likely to have at least one, thanks to the introduction of auto-enrolment, which made it mandatory for employers to offer their employees a workplace pension.

A defined benefit pension however is where a promise is made by the employer to pay a percentage of someone’s final salary (or an average in some cases) once they retire.  The longer you work for the employer, the greater the percentage you receive in retirement.  The income is guaranteed and carries no risk (other than the potential insolvency of the scheme and sponsoring employer) to the member.  The introduction of pension freedoms in 2015 has led to a heightened interest in members seeking to transfer the benefits from their DB pension to a more flexible pension.  This has been further compounded as we have seen cash equivalent transfer values reaching record levels during 2020.

If I want to take advantage of pension freedoms can’t I just chose to transfer my DB benefits into a new pension?

The short answer is no.  When pension freedoms were introduced, it became mandatory for anyone with DB benefits above £30,000 to seek suitably qualified financial advice before transferring. This has been further complicated since, as the FCA introduced a ban on contingent charging structures from 1^st October 2020 for advice on Defined Benefit pension transfers and conversions. This means that firms can no longer only charge when a transfer or conversion takes place, except in specific circumstances where a consumer is more likely to benefit from advice and is unable to afford non-contingent advice charges.

The regulator’s aim is to prevent firm’s from being financially influenced in recommending transfers as their charging structure meant they would otherwise not be paid for the work they have undertaken.

This, the indemnity insurance cost of providing such advice and the technical expertise needed to do so, has led to a further decline in the number of firms providing this service.

We are pleased to confirm Fiducia continues to hold the regulatory permissions for providing pension transfer advice and has adopted the Chartered Insurance Institute’s Pension Transfer Gold Standard service.  We have three Pension Transfer Specialists who have all personally achieved Chartered status.

So, what is the process to seek advice?

If a client is considering the options for transferring their Defined Benefits pension, we will initially provide them with the consumer’s guide to the Pension Transfer Gold Standard and run through a basic and entirely generic education process with them free of charge.

If they then decide they wish to receive advice, one of our Pension Transfer Specialists will discuss their position with them and provide abridged advice.   This is a new short form of advice that can result in a recommendation not to transfer, or to tell the client that it’s unclear whether they would benefit from a transfer based on the information collected.  This falls outside the ban on contingent charging.

They will receive a written recommendation from us to either retain their benefits within the scheme, or inform them that we are not yet able to take a view on whether it’s in their best interests to transfer without undertaking full pension transfer advice.  As less time is needed to undertake abridged advice, our fee is only £750+VAT and allows clients to receive specialist advice at a much lower cost than previously payable.

Having received this advice, should the client then feel they require full advice, we will provide this, incorporating a detailed cashflow forecast, and refund the cost of the abridged advice.  Within our full advice service, we provide a personal recommendation to retain their benefits, proceed with a transfer, or a mixture of both.  No additional fee would be charged if we arrange a transfer and this should give clients confidence that our advice is truly what we believe is right for them. Our fees are transparent and are fully in line with the revised FCA rules.

What are the likely fees for financial advice in this area?

These fees are summarised below –

Report focus                                                  Fee

Abridged advice                                   £750 + VAT

Full advice                                           2% of transfer value, subject to minimum of £2,500 and

cap of £25,000

For example:

A client is offered a defined benefit transfer value of £200,000. We would charge £750 + VAT (£900) for providing abridged advice. The client then decides they require full advice and our fee for this would be –

£200,000 x 2% = £4,000 – £750 = £3,250.

If we decide that a pension transfer is suitable and the client wishes to proceed, there would be no additional cost for implementing the transfer.

If you’d like to discuss pensions or any area of financial planning, then please send me an email at [email protected]