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Defined benefit pension transfers — ‘don’t do it’ is the best advice

The industry is entering a dangerous phase of the growing defined benefit pension transfers misselling scandal and it is advisers whose reputation is on the line


defined benefit pension transfersA major misselling scandal is brewing around defined benefit pension transfers, and for once it is financial advisers in the frame rather than the banks.

It is unlikely to reach the epic proportions of PPI claims – still pumping a quarter of a billion pounds a month into consumers’ pockets like some mini quantitative easing programme – but it will be big. Advisers should be thinking very hard about what their part in it will be.

I am talking, of course, about the growing industry of defined benefit to defined contribution transfers.

Giving up a guaranteed, index-linked income for the rest of your life and your spouse’s is a major step, and the safest advice to anyone who is considering doing so is “don’t”.

FCA: Only half of DB transfers rated suitable

It is easy for me to say that, I am not a financial adviser. But I am sure even the most dedicated “take the money” merchants would agree that, if you were to give the same advice to everyone, it would have to be to not do it, as the vast majority clearly should not.

We are entering a dangerous phase of the growing defined benefit pension transfers misselling scandal (as it will catchily be known), because the very high transfer values we now see – 30 or 40 times the annual pension – are unlikely to last.

First, the recent rise in the Bank Base Rate will make transfer values lower. Let us not overstate this. The bank rate has risen to 0.5 per cent, still the second lowest it has ever been and a fraction of its 20th century average of 5.64 per cent or even the 2.68 per cent average of this century to date (the daily average since 1694 is 4.71 per cent).

But Bank of England governor Mark Carney has hinted it may rise slowly to 1 per cent and commentators suggest it may hit twice that if the economy and consumers can cope with it. So we are heading for the foothills surrounding the eight-and-a-half-year plateau where it was 0.5 per cent or less. As interest rates rise, transfer values will inevitably fall.

Second, actuaries are also entering new territory where the steady climb in life expectancy is showing its own signs of plateauing, if not gently sloping downwards. Although the 2015 mortality figures indicated that this is happening, actuaries are slow beasts, harder to turn than a Chinese container ship.

DB transfers: ‘The buck stops with IFAs’

They can still hear the past Government Actuary Chris Daykin saying in October 2005: “Previous projections have assumed that rates of mortality would gradually diminish in the long term… However… the previous long-term assumptions have been too pessimistic. The rates of improvement after 2029 are now assumed to remain constant.”

If the 2016 mortality figures also show a drift downwards, that may be the moment when actuaries cut the cash-in value of an income for what is no longer an ever longer life.

There is one certain sign of a misselling scandal: buy now while stocks last. We are entering that period with cash equivalent transfer values. Beware.

I have another major concern about the advice to transfer. Commission. Oh sorry, wash my mouth out, because since 31 December 2012 that is not allowed. I mean its evil twin contingent pricing.

Commission was banned because it created a conflict of interest between the adviser and their client. Most advisers were honest enough not be consciously swayed by the promise of rewards for high commission recommendations but it undermined trust in all. Sadly, the commission cancer has metastasised into contingent pricing.

FCA urges caution over ‘streamlined advice’ on DB transfers

If the adviser earns 6 per cent, even 1 per cent, of a very large amount of money if the transfer happens but nothing if it does not, where is their objectivity? Of course, no readers of Money Marketing would let so venal a consideration cloud their judgement and many rightly charge non-contingent fees not percentages. But some advisers sadly are cast in a different mould. Why the FCA has not banned contingent pricing remains one of a long list of puzzles about its behaviour.

And it is not just advisers who may encourage people out of their final salary scheme. Employers are keen to remove future liabilities as they are encouraged to believe there are large and growing DB deficits (though they too may be reduced by the prospect of future Bank Rate rises). They are offering employees not just the CETV but money on top.

Fanning those flames are two quite reasonable fears of members. First, complete and utter mistrust in the company itself and its willingness to honour its pension promises as it is sold on and loaded with debt to the profit of everyone but the workforce. And second, that ultimately the company behind the scheme will be rescued in some grubby deal to keep the widget-making profitably intact but parcel off the pension liabilities to the Pension Protection Fund. That means the pensions paid – especially for higher earners or with good index-linking – will be reduced in value.

Of course, there are cases where converting a guaranteed income for life into a Sipp or even largely taxable cash is a good idea. Where health is poor and other resources small, for example. Where it is but one of several such pensions, or where the client wants to pass the value on free of inheritance tax.

More doubtful is where it is indicated by fashionable cashflow analysis, often based on questionable beliefs about future needs and likely returns, and underpinned by increasingly discredited results from “attitude to risk” software.

If you want to be right almost all the time for almost all people “don’t do it” is the safest advice – for both advisers and their clients.

Paul Lewis is a freelance journalist and presenter of BBC Radio 4’s ‘Money Box’ programmeYou can follow him on Twitter @paullewismoney

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There are 45 comments at the moment, we would love to hear your opinion too.

  1. “More doubtful is where it is indicated by fashionable cashflow analysis, often based on questionable beliefs about future needs and likely returns, and underpinned by increasingly discredited results from “attitude to risk” software.”

    I’ll have to go back to the more traditional and more accurate methods then.

    Someone pass me the fag packet please, oh, and the crystal ball, I want to do some “Financial Planning”.

  2. As a financial adviser who is transferring his own DB benefits into a DC pension, I find Paul Lewis’s unregulated posturing and blanket assertions irritating.

    Thankfully, we are the only people who listen to him and then go and give our clients personal, regulated and costed guidance. I do hope that we are all fully outlining the advantages and disadvantages of this transaction, which fo

    • Hi John,

      I’d recommend checking the transfer regulations. You can’t certify the transfer paperwork for your own safeguarded benefits. Another authorised financial adviser will have to sign the declaration.

  3. paolo standerwick 10th November 2017 at 11:24 am

    Paul I think before you write articles effectively giving advice in the matter of DB pension transfers, may I suggest you sit and pass the required examinations papers. Unless of course you are fully qualified already?

  4. It is easy for me to say that, I am not a financial adviser. But I am sure even the most dedicated “take the money” merchants would agree that, if you were to give the same advice to everyone, it would have to be to not do it, as the vast majority clearly should not.

    Clearly this lewis chap has an opinion of ifa’s lets stop reading his crap articles

  5. I’ve no doubt there will be uncovered plenty of poor pieces of advice where clients have transferred out of DB schemes, but to write off cashflow planning as ‘fashionable’ rather than give any credit to advisers who are trying to paint a vivid picture for their clients is a little one-eyed.

    Furthermore, there’s a lack of joined-up thinking on display here. If transfer values are currently 30x and 40x the pension on offer, surely Paul’s views on interest rates and plateauing life expectancy make it even more attractive to take the transfer, as far better annuities will be available in the future as a result.

    We’ve told people not to do it, we’ve told people to do it, but the problem with financial advice is it’s very difficult and DB transfers are fiendishly complex. Also, individuals are all very different. That’s why we don’t give everybody the same advice and why we do (gasp) charge for that advice.

  6. ..r many clients offers flexibility, security and greater value for money.

    Lewis’s latest rallying whimper, no to contingent pricing, is yet another example of him tilting at windmills. In many fields of human endeavour, work is only paid for when done and not paid for when it isn’t. The consumer must judge how they spend their money and if regulated, the regulator must provide oversight of business practices.

  7. Didn’t even read the article as the daft pronouncement in the heading says it all. Nice click bait though!

  8. I thought he said he was NOT a financial adviser.

    No one would have guessed.

  9. Paul, I struggle with your logic.

    40 times income is huge, and to put that into context, the client has to decide; does he want £500 per month until he dies, (dropping to £250 per month for his wife if he dies), or £240,000 in a pension. I know which I’d want.

    If this was £240,000 in a personal pension, would anyone really buy an inflation proofed annuity paying £6,000 per year?

    And of course, with increasing interest rates, come (hopefully) improving annuity rates. So, it could be a high transfer value now, and high annuity rates later.

  10. Paul’s a talking head. He gets paid for being so.
    The more ‘controversial’ he is the more work he gets so the more he gets paid.

    I imagine if, on his BBC Moneybox programme, he was frequently heard to say ‘Well, I don’t actually know’, BBC would soon oust him in favour of a more charismatic (although less honest) pundit.

    As Daniel Kahneman puts it

    “Experts who acknowledge the full extent of their ignorance may expect to be replaced by more confident competitors”.

    Still, if I had to bet my house (or my business) on the thrust of his arguments in this particular article being right or wrong – I’d go with right.

    • Ivor,

      I agree that the thrust of his arguments may be right, but surely the conclusion that he is tending towards is wrong: just because the best option for the majority is to stay put, it does not mean that everyone should be given that advice. If that were true, ‘know your client’ could go straight in the bin, and all advice would merge into unfocused guidance.

      The problem is that as Mr Lewis says, the ‘safe option’ is to stay put. And that means that there is a bias towards the safe decison for advisers and away from what may be the optimal decison for clients.

      But the FCA think that this is fine becaue it counterbalances the inbuilt bias that clients have to do the wrong thing…

  11. An irresponsible article at best. This area of planning will only become a misspelling scandal if individuals such as PL continue to promote it as such. There are many reasons why a BD transfer is appropriate. Disgraceful journalism but great ammunition for the non regulated claims management companies.

  12. Personally not authorised for DB transfers but lets look at papers put in front of me recently.

    Divorced lady, 2 children, deferred DB pension.
    Now in another job with good pension scheme.
    Deferred pension £2,385
    Spouses pension 50%
    Death before retirement, return of contributions £4,023 + 50% spouses pension.
    TV £92,522.
    Death after retirement, 50% spouse.

    So, spouses pension no good whatsoever, (yes circumstances may change)
    What would she rather give her children if she dies £4,023 or £92,522

    Is that a clear case for staying in the scheme? I know what I would do but that is a personal opinion, which is why I referred her to an IFA firm that deals with such cases.

  13. John,
    Paul also does Moneybox on Radio 4 and repeats much of what he says here, many people listen to him and believe he is giving advice.

  14. “It is easy for me to say that, I am not a financial adviser.”

    That’ll be news to anyone who’s been following Lewis’ columns in which he’s repeatedly said that he should be allowed to call what he dispenses in his radio shows and media articles “advice”. So he gives “advice” on financial matters but he’s not a financial adviser? Indeed, in an article on 5th November 2015 he suggested that he has more of a right to the label “financial adviser” than regulated professional IFAs do because his “financial advice” covers a wider range of financial topics than theirs (e.g. benefits, credit cards and overdrafts).

    It is indeed very easy for Lewis to make blanket statements and tell his radio listeners “don’t do it”, because if they subsequently die and their heirs find that his advice has lost them hundreds of thousands of pounds, or they realise that as they had enough guaranteed income already the DB pension was of relatively little value and they’ll never get a chance to take a 40x CETV ever again, they have no redress.

    And yes, the article is more nuanced than the headline, but the headline is all most people will read.

  15. Waste of ink, again

  16. Paul’s absolutely right – he’s not a financial adviser (and never could be based on the arguments he uses in the article) !!

  17. I must admit I am very curious how unqualified hacks such as Paul are provided with so many column inches in a “trade magazine”.

    Paul clearly imagines himself an expert, he clearly gives advice many times in this “paper” and on his moneybox programme and yet somehow he is never prosecuted for giving advice whilst being unlicensed and unqualified.

    That’s before we even consider that in this article alone he has more than adequately demonstrated he doesn’t have a clue what he is talking about.

  18. On the face of it I would be inclined to agree absolutely. Not only is it daft, but advisers seem to be creaming it.

    But – as ever – there is a but. If the firm goes belly up and the adviser has advised to stay put he would be in the doo-doo just as much as if he had suggested a transfer out of a good solid company. On the one hand you have the BHS members on the other those that work for IBM and who were cajoled and pressed to give up their DB plans years ago. I advised those who consulted me on the matter to sit tight and hang on to their DB pension. Not much money in it, but then no complaints either.

  19. Christopher Petrie 10th November 2017 at 1:45 pm

    Apart from the occasional and unnecessary sarcie comment, this is a good article.

    A major life office ran a series of DB seminars recently. I asked about those advisers operating a “sausage machine” system. The Rep agreed there were some issues and they “were concerned” about them. I asked therefore how many DB cases they had turned away. The answer was…of course…none.

    Everyone knows there are some major mistakes being made every day right now. But some IFAs don’t care, life offices don’t care (not their legal problem) and the FCA is just too slow to stop the problem they know is there.

    For clients with 15 years or so to NRA…the question for most of them is Why would you transfer now, and take on the investment risk? If you want more flexibility at retirement, choose it then, when you know your comparison far more clearly.

    The next scandal is just a stock market crash away.

  20. Suitable advice is about individuals and their personal circumstances needs and wants. It is never about broad groups of people.

    There will be some individuals who benefit from transferring DB to DC and some who won’t.

    The value of a competent skilled qualified and experienced adviser is that they know when to and when not to and advise accordingly

    Well worth paying money for

  21. “If you want to be right almost all the time for almost all people “don’t do it” is the safest advice – for both advisers and their clients.”
    What about the clients for whom transferring is the best option. Advising them “don’t do it” will be negligent and could just as easily lead to a claim.

  22. Well worth reading the 2017/18 Study Text AF7 Pension transfers from the CII and the Good Practice Guide Pension transfers from defined benefit to defined contributions from The Personal Finance Society to help form a rounded opinion on this subject

  23. Prior to pension freedom I would tell most client to remain in DB arrangements. Pension freedom is now another option that has to be discussed with the client. Paul have you ever thought that not discussing pension freedom could also be a case for mis-selling claim.

    The Government has to make a decision they are 100% behind the policy of pension freedom or scrap it because they feel people in their 50s are not capable of looking after their own money.

  24. BTW although Paul Lewis works for the BBC he openly admitted he is self employed. The BBC shouldn’t contract self employed people as he has the benefit of tax deductible expenses and some guaranteed income from BBC with no risk to his so called employment status. This is what many BBC employees do. They get funded via the license fee (another tax for us), benefit in some case of their DB schemes, guaranteed fees/salaries. Is this fair to those who are really self employed and are at risk of lean periods of work?

  25. So all my confirmation of advice letters will state that Paul Lewis thinks it is a bad idea so I will not do it.
    Hope Paul has lots of PI cover.

    In all seriousness, saying no, which has been the FCA default position to date, can now get you into trouble if that proves to be the wrong advice in hindsight.

    Doing the right thing may just turn out to be the wrong thing, and how many clients will pay to be told they cannot have what they want? I am not sure there is a safe answer to this problem.

  26. Cannot argue with most of Paul’s comments or observations, and our company advise on DB Transfers. For once Paul has only offended me slightly.

    Illustrations and Modeling, question to you all, has anyone EVER seen an illustration that has been right? Modelling tools, the future is uncertain and modeling in my opinion gives the client a false sense of security.

    Its a strange world we live in, you can write in BIG RED LETTERS all the dangers. I ask the clients to close their eyes, imagine being 75 and the income stops, you have no more money, to try and bring the danger home to them. There is a fact, the client wants to live for today and becomes blind to the negative outcomes no matter HOW bluntly you state them.

    My issue, advisers have been made the moral police, with no clear rules, guidance is not worth anything. This is not my job, this should be the regulators.

    My job is to point out the risks, the dangers, the options and if I am prepared to advise and transact based on the information. It should not be my responsibility having provided clear advice, information of the dangers, highlighted the risks, no income if it runs out to be able to prevent that client from transferring. We do refuse if we are not happy with a case, but that is more to do with protecting our business, PI, reputation and future ambulance chasers. Everyone seems to be blind to the fact these are the clients funds.

    Another issue Paul has highlighted are the current transfer values. This does concern me, as if we recommend not to transfer, wait until the client retires and has to access the pension, the values fall, the client potentially has a claim for poor advice. Having refused to transact the clients wishes, we still cannot feel safe. It is the complete opposite of a transfer undertaken 20 years ago, today the transfer value would be much, much higher.

    My fear has always been that when the funds run out, it will ALWAYS be the advisers fault, as no one these days seems to want to accept responsibility for their own action, this includes the regulators and Government. We advisers unfortunately are not given a choice or a legal long stop.

  27. There is always those for which transferring out is the best solution and I would like to see this discussed.

    I transferred out of the DB scheme after looking into the pro and cons.

    I am single no spouse or children and now have the flexibility to decide what to do with my investment. Yes the values can go down as well as up and if i remained in the DB scheme I am totally aware of the guarantees.

    I can draw down on the money when I want and feel in total control to be able to enjoy life rather than restricted to the guarantee income from the DB scheme.

    Since I have set up the SIPP this has gained considerably over the 18 months but do accept it could equally go down. By using a good IFA they will set up the investments to try and smooth out any of the investments that could drop in value and this is carried out by them after they assess your likelihood to risk.

    Personally for me it was the correct course of action especially when it was drummed into me that you should not come out of DB scheme.

    Whilst DB may be right for most there is always those it would wrong to remain in the DB. As a journalist Paul should be equally clear who would benefit from transferring rather than promoting that you stay remain.

  28. I’m inclined to agree with Chris Petrie on this and share Martin Evans concerns, hence one of the (many reasons) I don’t have DB pension transfer permissions and remain unlikely to apply for them.
    Damned if you do and damned if you don’t so on the rare occassion I come across someone with a DB transfer I will continue to explain the cost of DB transfer advice and offer to introduce them to a firm with permissions. Fortuntaly we don’t have many DB scheme employers round here anymore.

  29. paolo standerwick 11th November 2017 at 9:14 am

    MIFID should include regulating the press when writing financial articles.

  30. Paul Lewis is getting on. Perhaps time he needs put out to pasture. His strength is in protecting the vulnerable and getting them their heating alowance, 50 pence interest on their cash benefits.As soon as he strays into the bigger complicated stuff though he does tend to make a fool of himself.

  31. Journalists like the FCA sheep pen people, and paint everything with a broad brush !

    This is why Paul is right, and then in the same breath so far of the mark he is in another post code !

    We as advisers don’t, every single person is an individual when we go to see them or they come to see us. And the advice they get is bespoke to them, its not based on segmentation, its not based on the wider view, and certainly not based on the the view point of the equivalent, of the bloke in the pub !

    A sweeping statement is what it is…..I think Paul’s done his job well on this.

  32. Of course Paul Lewis doesn’t know what is going to happen in the future. None of us do.

    Six months ago, if you had asked me how you could find out I would have told you to find a bloke in a blue box and ask him to take you there to see for yourself. It turns out even that advice would have been wrong because after Christmas the bloke will be a woman!

    I think Paul is right in predicting a misselling scandal, though. I think as soon as the PPI gravy train finally pulls into the station, the ambulance chasers will rush across the platform and pile into the DB transfer one.

    I am long enough in the tooth to remember the last one. I made good money out of my involvement in sorting it out – though in a different league to Messrs Hazell and Carr et al.

    If you want to avoid getting getting your fingers burned by it the three most important things are Documentation, Documentation, Documentation.

    Document that your client understands what they are giving up.

    Document what your client stands to get in return.

    Document that your client understands the risks associated with moving – what might go wrong and your understanding of the probability of it doing so.

    Document why you believe, in the SPECIFIC circumstances, this is a risk that the client can accept (taking account ATR and capacity for loss etc).

    Document that your client (not you) decided only after they were empowered to make a knowledgeable decision.

    And for goodness’ sake, do NOT give “you wanted to transfer” as a reason for doing so. That is a decision made in ignorance, not knowledge.

  33. @ Peter Turner – Ot if you don’t want to get your fingers burnt, don’t get an appropriate DB transfer qualification, don’t aply for DB transfer permissions and don’t comment on the rights or wrongs of a transfer to a client with a DB plan, simply clarify the likely cost of DB transfer advice and then if they wish to proceeed, pass them on to someone who has teh qualification and permissions. (my locum has the qualification, but chose to let his permissions lapse)
    The DB advice needs to be seperate from any other advice simply because of the different PI risk and as such advice on DB transfers shoudl form a seperate levy section, just as SIPPs should. These are specialist areas, which the PI market withdraw from pretty much in the last DB transfer misselling debacle and our clienst cannot afford for us to stop advising simply because of a future PI problem if we rarely do DB transfers, so best simply nopt to do them anymore as my locum decided.

  34. I can understand in a lot of cases the advice will be to stay in the DB scheme, but as outlined above there are definitely times to move out of them.

    What gets me is that Paul is not a regulated adviser as far as I know (happy to be corrected on this) but his article states the following “Giving up a guaranteed, index-linked income for the rest of your life and your spouse’s is a major step, and the safest advice to anyone who is considering doing so is “don’t”.”

    If he was a regulated adviser then he could make this comment, he is not and should not be making that assumption.

    How do others see this?

    • Simon, I think Paul is simply expressing an opinion and some authorised and regulated advisers may well voice similar views. I’m pretty sure Journalists are exempted from the rules and regulations by which you and I need to abide to deliver a personal recommendation.

      You and I deal with individuals whereas the media deals with whole swathes of people. It’s advice but not as you and I know it


  35. I have had many discussions with many clients over the last 30 years about the pros and cons of buying annuities etc. in a recent discussion with a client who has around £500,000 invested between various pensions & Isa’s, we discussed the option of using it all to buy a guaranteed income for life. Her words were “If I had £500,000 cash in the bank I wouldn’t do this so why should I be so stupid as to do it just because it’s in my pension & Isa for my retirement. Are you insane?” This is very typical of many clients with substantial sums accrued for their retirement and not a single one has indicated they would use this to buy an annuity or a guaranteed income for life. They much prefer to have this under their control, invested as they see fit and with the flexibility to pass on or to draw down at a faster rate if they have a life limiting illness. You would write on the back of a postage stamp what Paul Lewis knows about providing real advice to real people in real circumstances. Its so easy for him and those like him to spout forth their views as if that’s the only viable or sensible position to adopt. One of the real crimes which has gone largely unpunished for many years is the capital which people have lost because they have either bought annuities and not received all of their money back or where they have taken benefits from their DB scheme in the usual manner then failed to live long enough to benefit. Pensions freedom is one of the best things to happen and it empowers people to use their own money as they see fit. Why should we have this “nanny state” mentality which dictates people are too stupid to know how to use their own money as they wish to meet their own circumstances and objectives.

    • I am very concerned that even those who, like me, who can’t and won’t comment on DB transfers that we will all be picking up the bill for these via the FSCS.

  36. Yet again a load of rubbish from Paul, he is OK in his tweed jacket & BBC fat cat salary.

    Sadly a client of mine who did transfer from DB to DC died this summer, the positive is the fund now passing to his daughters rather than being lost to the scheme !

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