The pensions market has never been all that easy to understand, but a potential new ban on contingent charging is set to shake up the model, and it could be strongly in the interest of the British consumer.
Here’s the lowdown from our expert, Glyn Taylor:
Defined Benefit vs Defined Contribution pensions
“Currently, pensions are either classed as Defined Benefit (DB), or Defined Contribution (DC).
“DB pensions – which are usually workplace pensions – are extremely valuable as they offer a guaranteed, inflation-proof income year on year.
“The value of DC pensions, on the other hand, can fluctuate depending on the financial landscape. These can be workplace or private schemes.
“In 2015, the government brought in new pension rules that allowed anyone with a DC pension to access their pension pots from the age of 55, should they wish to. This meant that some DB pension holders wanted to seek advice to see if it would be suitable for them to make a switch.
“Concerns were raised by the FCA after a consultation paper found that 69% of consumers were advised by financial professionals to transfer their DB pension to a DC scheme, despite its view that most customers would have been best advised to stick with their original policy.
“The FCA estimates that the harm created by unsuitable DB transfer advice is up to £2bn each year.”
What is Contingent Charging?
Contingent charging is where financial advisers only get paid if a transfer proceeds. According to the FCA, this creates an obvious conflict of interest and could be the next mis-selling scandal.
Glyn continues: “The FCA wants to change the way that advisers are paid for transfer advice. If advisers are pushing schemes that are not in the benefit of the pension holder, or not providing the best advice on offer, simply because of the way they are compensated, this creates a huge problem for hard-working Brits who are entitled to feel as secure as possible in their retirement.
“Sixty-nine percent of people are advised to transfer their money from a secure DB pension to a DC scheme. This is despite the fact that most would be better off with their original policy. We firmly believe that any advice given needs to be in the consumer’s best interest, not because the adviser is being paid a commission to recommend switching to a certain provider or scheme.”
The FCA’s consultation also says that they are “proposing remedies that are intended to improve consumer engagement with the advice process. By improving disclosures of advice charges before the advice process starts, we will empower consumers to consider whether they want to incur the costs of advice and be more aware of potential adviser conflicts.”
Unfair on financial advisers?
Glyn continues: “Critics of the proposed ban say that the move will drive good advisers out of the market. This will reduce choice for pension holders. They are not confident in choosing the best pension option without advice from a professional. It also means that they may have to pay upfront for financial advice. This will put some people off seeking help, especially if they are on a lower income.
“This could well be the case. However, the fact remains that, if hard-working Brits are being advised to switch their guaranteed pension pots to unsuitable and less beneficial schemes that would have a significant impact on their pension, it is clear that something needs to be done to address this scandal.”
The FCA’s consultation closes on 30th October. If a ban is proposed, this will potentially come into play in the first quarter of 2020.
Do you think you’ve been mis-sold a SIPP? Have you been advised to transfer your pension to a less suitable scheme? Get in touch with our experts to find out how we can help.