FCA launches new DB transfer redress calculations

"Whether firms make the redress payment directly into a consumer’s personal pension or in the form of a lump sum, firms must take account of the consumer’s tax position"

Following a review from PwC a number of changes have been made to the methodology for working out redress, including changes to inflation and charges assumptions.

Changes to the guidance include updating the inflation rate to the Bank of England’s 40 year inflation forward curve gilts and allowing for lump sum payments to be factored in as well as the annual income from a DB pension.

The FCA says adviser charges on top of fund charges should be taken into account as well as pension charges up to a maximum of 0.75%.

When paying the redress, firms must also consider the tax implications of this for consumers. The FCA says: "Whether firms make the redress payment directly into a consumer’s personal pension or in the form of a lump sum, firms must take account of the consumer’s tax position and ensure that any tax restrictions or liabilities have been allowed for appropriately."

The new rules also simplify the pre-retirement discount rate, which is the rate personal investments are likely to grow before retirement. The ‘life-styling’ element, which assumes a reduction in the level of risk in the portfolio as the consumer approaches retirement, will no longer be included in the calculation. The FCA says "this change will reflect the likelihood of consumers receiving redress taking advantage of the pension freedoms".
    
Redress must also take into account marital status and the age of the spouse, where known.

Under the new methodology, for an individual retiring in 15 years, the value of a £2,800 per annum DB pension at retirement date is now worth £54,000 compared to £44,600 under the previous methodology - an increase of 21.1%.

However the FCA stressed that any redress payments "will vary greatly between consumers" and said "it is unlikely that affected consumers will have more than 15 years until retirement".