FCA issues warning on pension transfer advice

"Unless the advice has taken into account the likely expected returns of the assets, as well as the associated risks and all costs and charges that will be borne by the client, it is unlikely that the advice will meet our expectations."

The regulator says it is concerned that consumers receiving this advice "are at risk of transferring into unsuitable investments or – worse – being scammed".

Clarifying its expectations for firms, the FCA said: "We expect a firm advising on a pension transfer from a defined benefit scheme or other scheme with safeguarded benefits to consider the assets in which the client’s funds will be invested as well as the specific receiving scheme. It is the responsibility of the firm advising on the transfer to take into account the characteristics of these assets.

"Unless the advice has taken into account the likely expected returns of the assets, as well as the associated risks and all costs and charges that will be borne by the client, it is unlikely that the advice will meet our expectations."

It stressed that a firm advising on a pension transfer should not undertake a comparison using generic assumptions for hypothetical receiving schemes and must take into account the likely expected returns of the assets in which the client’s funds will be invested as well as the specific receiving scheme.

The FCA also reiterated that it is not acceptable for a firm without permissions to outsource the transfer analysis to a pension transfer specialist or to a firm with the permission, and claim to be advising on the pension transfer.

It also set out rules surrounding advice on pension transfers to overseas schemes.

The FCA said: "We acknowledge that non-UK residents considering a pension transfer are likely to need to seek advice from both an overseas adviser for investment advice and a UK adviser for advice on the proposed transfer.

"In order to advise on the merits of the proposed transfer, the UK adviser should take into account the specific receiving scheme, including the likely expected returns of the assets in which their client’s funds will be invested, the associated risks, and all costs and charges that would be borne by their client.

"This means liaising with the overseas adviser where necessary."

It also stressed that in situations where where is no requirement that advice be taken, for example where the value of the safeguarded benefits is £30,000 or less, FCA rules still apply to any advice provided.

The regulator says it expects firms to consider the assets in which the client’s funds will be invested as well as the specific receiving scheme.

Finally, it added that where a firm recommends a pension scheme knowing that the client will switch from a current pension arrangement to release funds to invest through the scheme, the suitability of the assets in which the client’s funds will be invested must form part of the advice given to the client.

Steven Cameron, Pensions Director at Aegon, said: “We’re pleased the FCA is looking at its expectations around DB to DC transfers. However, we believe a more fundamental review is needed of the ‘TVAS’ approach to fully reflect the freedoms now available to those with DC pensions from age 55. TVAS still assumes people will replace their DB pension with an annuity from the scheme’s retirement age, which is clearly no longer the ‘norm’.

“The FCA is right to highlight the importance of investment strategy after transfer. However, this can’t be framed solely on the basis of ‘will this beat a critical yield’. It also needs to reflect the customer’s intended approach to drawing an income and from what age.

“We note the FCA’s references to taking personal circumstances into account. Attitudes towards the pensions freedoms are a major part of this and we’d welcome an expansion from the FCA on this key point.”