Pension Transfers Treading a delicate path
Nigel Orange explores some of the key issues facing advisers when transferring clients from a defined benefit scheme to a defined contribution scheme post-April 2015
It is clear that giving up guarantees for new pension freedoms requires expert financial advice and a cautious approach. The rules following the announcement of the pension changes mean:
• Private sector transfers from DB schemes to DC schemes can continue.
• Transfers from unfunded public sector DB schemes will be prohibited.
• Transfers from funded public sector DB schemes will be allowed.
Speaking to advisers, there is evidence that many individuals are asking questions about transferring their DB benefits into more flexible pension arrangements. So where does the adviser stand in transacting this type of business?
The Government has published a number of requirements detailing how they expect advisers, firms and trustees to deal with this business, with further regulations expected before and after 6 April 2015.
Government and regulators’ position Safeguards are being introduced to protect both individuals and pension schemes in relation to DB to DC transfers. A new requirement is for the member to confirm to the trustees/managers that “appropriate independent advice from an authorised independent adviser”, regulated by the Financial Conduct Authority (FCA), has been given before a transfer can proceed (this change is included in the Pensions Schemes Bill 2014). Confirmation must be given in
writing from the authorised adviser/firm that appropriate independent advice has been given to the member/survivor and the trustees/managers of the originating scheme must check on the FCA website that the adviser confirming advice is properly authorised to conduct pension transfer business. An exception to this is where the transfer value is less than £30,000, in which case independent advice is not a requirement.
The Pensions Regulator (TPR) issued a consultative document (DB to DC transfers and conversions) in February 2015, which “is the first part of a package of communications to help trustees prepare for major pension reforms…”. This consultation reflects the relevant provisions of the Pension Scheme Bill 2014-15 and associated secondary legislation that will shortly be published by the Department for Work and Pensions. It provides comprehensive guidance to enable trustees to put in place processes to manage the new flexibilities. These processes deal with the position of the trustee, the member and the scheme.
For a firm to engage in advising on transfers and opt-outs, specific FCA permission is required; without this permission the firm cannot give advice on transfers. Any advice must be given or checked by a pension specialist. Any such specialist must follow the FCA’s training and competency rules and have the required level of qualifications. The onus is now on the trustees/managers of the pension arrangement to check and it is they
who cannot proceed with the transfer unless the requirements have been fulfilled.
Taxation changes
All dependants’ pensions paid from drawdown as a result of the member dying before the age of 75 will be tax-free. All joint- life pension annuities paid as a result of the member dying before the age of 75 will also be tax-free. However, there will be no change to dependants’ pensions paid from DB schemes and these will remain taxable. This tax treatment creates an uneven playing field and could itself be a reason for transferring.
There are some basic rules to apply to anyone considering a transfer from a DB to a DC pension, including, but not exclusively, to:
• Take great care before leaving a DB scheme.
• Seek professional advice; this will be a regulatory requirement if the transfer value is £30,000 or greater.
• Avoid and be aware of pension transfer scams.
• Consider carefully any enhancement to leave a DB scheme - a recent FCA review found one-third of those looked at caused concern.
• Consider the risk of transferring to a DC scheme.
• Consider the risk of staying in a DB scheme.
• To consult others who may be affected by the transaction, for example a spouse, family members and solicitors. • Consider their tax position.
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Investment Life & Pensions Moneyfacts
® March 2015
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