Defined benefit pension schemes – don’t get caught out!
Pradeep Oliver, a leading financial services negligence specialist at law firm Cripps Pemberton Greenish, examines the new scandal surrounding defined benefit pension schemes and what you can do to safeguard your position.
Some of you may recall the pension mis-selling scandal that occurred in the late 1980s and early 1990s when commission-hungry salesmen wrongly advised as many as two million people to opt out of occupational schemes and take out personal pensions.
The 2015 pension freedoms have allowed people greater access to their pension pots. An unforeseen consequence of this has been a significant increase in people seeking advice on transferring out of their final salary occupational schemes in order to obtain access to their tax-free cash.
The Pensions Regulator has estimated a total of 80,000 transfers have been made from final salary schemes over the last year. This demand, combined with the charging structure adopted by many advisers means that a repeat of the mis-selling scandal may be just around the corner.
Upon retirement, final salary schemes (also known as defined benefit pensions) pay out a secure income for life, which increases each year. You might have one if you’ve worked in the public sector or for a large private sector company.
An employer contributes to the scheme and is responsible for ensuring there is enough money at the time you retire to pay your pension income. Unlike other pensions, these schemes are not dependent on the vagaries of the investment markets. If you are lucky enough to hold such a scheme, do not consider parting with it lightly or you may discover you have lost a guaranteed retirement income that cannot be replicated.
In a recent case on which we advised, the client was in his 40s when he followed the advice of his financial adviser to transfer his pension fund out of his occupational scheme and to invest that fund in two non-guaranteed pension schemes. His occupational scheme guaranteed him a healthy annual income once he reached retirement age. In order to achieve the same income in retirement that was guaranteed by his occupational pension, his new investments would have needed to achieve very high consistent growth of ten per cent per annum until he reached pensionable age. Both non-guaranteed pension schemes have since failed completely, leaving the client with no pension provision whatsoever.
There has been a long-standing assumption that it would be unsuitable for an adviser to recommend a transfer out of a final salary scheme without compelling reasons. The Financial Conduct Authority has recently announced an intention to remove this assumption, which would allow financial advisers more flexibility in advising a client to transfer out of final salary schemes.
Financial advisers have been banned from receiving commission for recommending pension products since 2012. However, there are increasing numbers of advisers who only charge a client for advice if it results in a pension transfer. This is known as “contingent charging” and gives the adviser a financial incentive to recommend a transfer out of an occupational scheme, even if this is not in the best interests of the client. A recent poll by AJ Bell showed 50 per cent of advisers conducting pension transfers charge on this basis. While, the vast majority are committed to ensuring their clients receive the best advice, unfortunately there will always be a minority who are more concerned with their own profits.
If you are considering transferring out of an occupational scheme you should be aware that such a decision is irreversible and your retirement plans may have to be dramatically altered due to an immediate desire to obtain a cash lump sum. We recommend advice is always sought from a good, regulated financial adviser who does not charge on a contingent basis!
If you have already transferred out of a scheme because you were advised to by a financial professional and the risks of losing your guaranteed benefits were not properly explained, the product was not suitable or they wrongly assumed your new scheme would outperform your original pension, we may be able to help.
For a free, no obligation consultation or if you have any questions, please contact Pradeep Oliver on 01892 765 453 or at firstname.lastname@example.org.
First appeared in the August 2017 edition of Kent Life.