Govt plans on advice requirement could reduce advice take-up

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Fewer consumers will need to take mandatory financial advice on their pensions under new rules proposed by the Department for Work and Pensions.

Since the pension freedoms were introduced, individuals with more than £30,000 of safeguarded benefits, for example guaranteed minimum annuity rates, have been required to take independent financial advice before they can transfer or convert them into flexible benefits.

The DWP has set out plans to change the way safeguarded benefits are calculated by pension schemes before deciding whether or not individuals must take advice after the industry raised concerns about the methodology.

The DWP says particular confusion arose when the fund available to be paid as a lump sum was less than £30,000, but potential future guarantees were above £30,000.

Providers must now treat the value of safeguarded benefits as equal to the actual transfer value of the funds at that time, as opposed to the estimated present value of the pension the member could secure by exercising their guarantee at a future point.

In a consultation paper published yesterday, the DWP says this change would reduce the number of people having to seek advice on their pension.

The consultation says: “The decision to base the new valuation methodology on the transfer value of the member’s safeguarded flexible benefits and not the estimated value of the pension income they could secure in respect of those benefits will reduce the numbers of members required to take financial advice.

“The new valuation method will therefore increase the risk that more members will surrender them without being informed of their value.”

As a result, the DWP wants to make ceding schemes send additional risk warnings to all clients with safeguarded benefits except those that are non-flexible such as final salary benefits, after its research found consumers did not always understand the full value of their guaranteed benefits.

The DWP wants the risk warnings to be sent “at the point the member is considering, but has not yet instructed their provider to proceed with, a transaction”.

They will need to communicate the guarantees to the member, their terms or conditions, and a comparison of what rate of secure pension income the member would receive compared with what they could buy on the open market.

Individuals who were due to take mandatory advice but will fall below the £30,000 threshold under the new calculation method will need to be told by their scheme within 20 days of the new rules coming in to force that they can now access their benefits without advice.

The Government first committed in principle to rethink the advice and risk warning rules in a March call for evidence, but has now released draft legislation on the matter.

The consultation closes on 7 November, with the DWP looking to put forward the legislation “at the earliest reasonable opportunity.”

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Comments

There are 2 comments at the moment, we would lover to hear your opinion too.

  1. Honestly, in 19 years of explaining pensions I have yet to come across 1 single client who knew the value of any guaranteed pension benefits they have. However most of them did then understand once explained and in most cases then decided to take our advice to use the guarantee’s (if appropriate)

  2. This is a great get out clause for insurers having to fund GMP liabilities. The last case I came across the insurer had to stump up an additional £185,000 to cover the GMP. If this legislation goes through then that particular insurer will get away with paying a transfer value of just £68,000 rather than have to fund a GMP annuity which required a fund of £253,000
    There is no way insurers will come clean about the true value of these, it is only people like us that are in a position to protect these individuals, some of whom do not see the value of the advice. Thank God the client who was initially offered just £68,000 decided to walk into our office.

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