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John Lawson: Going back to basics on DB transfers

DB transfers are the hot topic among clients. But advisers need clarity on the question of accountability should decisions come back to haunt them.

Defined benefit to defined contribution transfers are dominating the headlines at the moment. It is the hottest ticket in town but we should not lose sight of how this has come about.

The pension freedoms introduced in 2015 transformed the way people could access their DC pension pots. People with DB pots saw this and wanted a piece of the action. Then came the steady rise in transfer values.

Take Bob, who is a gas fitter. He has been doing the job most of his life and, while he is not earning a huge salary, he has done pretty well. He has been a member of his company’s DB scheme and is coming up to retirement. He requests a transfer value and it comes back at around £1m. Word spreads around Bob’s colleagues and more transfer values are requested. The snowball effect ensues.

Such transfer values have understandably caused much excitement among the public. But recent weeks have seen a greater focus put on the potential consequences of these transfers.

The FCA is currently consulting on how it regulates DB transfers but it remains unclear who will be held accountable in years to come should someone who took a transfer later decide it was not the right move.

Some advice firms have now pulled out of the DB to DC market, or at least put a pause on new business.

Follow the money: Where are advisers going wrong on DB transfers?

Research we recently conducted puts into perspective why this is such a tricky area. We found four in 10 people say they are still negatively impacted by financial mistakes they made in the past. That is a pretty significant number of people carrying around some weighty financial baggage.

Almost two thirds of people also said they wish they had managed their finances differently. I find this particularly interesting as it means there are a third of people who appear to have no financial regrets at all.

The research also found almost a quarter of people aged over 65 are still being adversely impacted by financial mistakes made earlier in life.

So the figures clearly show that financial decisions can have consequences that last for years. In the case of cashing in a DB pension, those consequences could be with you for the rest of your life.

No one should be cashing in a DB pension pot without taking advice. In fact, as you know, if it is worth more than £30,000 someone has to take advice. Giving up guaranteed income for life is a big decision that cannot be taken lightly. For some people, it is absolutely the right thing to do, but as an industry we need some clarity on who can be held accountable and in what circumstances.

As for Bob, I am sure £1m sounds very tempting, but only if it lasts as long as he does.

John Lawson is head of financial research at Aviva

We are debating what next for DB transfers at Money Marketing Interactive, which is being held at the Majestic Hotel in Harrogate on 14 September. To join over 100 advisers and register to secure your free place, click here.


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There are 5 comments at the moment, we would love to hear your opinion too.

  1. Robert Milligan 4th August 2017 at 10:53 am

    There we go again,,, another product provider bleating on ,,, Interesting he has failed to say what the £1,000,000 was in stead of, I think most people without doubt would take the money, at least he has it, if he spends it, that’s down to him, surly

    • To be honest, Robert, John Lawson isn’t really bleating on. His conclusion is fair that making wrong decisions in this arena can last a life time and his premise is that people should take advice from the likes of us to reduce the possibilities of poor or worse outcomes.

      It’s a sad fact, however, that the product providers/fund managers will also benefit from feeding at this humongous financial trough of DB transfer money, without any liability in the future. AMC’s and Product Charges will drip into the P&L accounts and Balance sheets of these organisations, but only the ‘adviser’ will be charged as and when things go wrong. A useless and redundant comment, I’m afraid, as I have no solution to even suggest, but just an observation.

  2. Let’s say that Bob worked as a British Gas engineer for Centrica Robert. His transfer value would buy him a pension for life of between £25k and £30k growing with inflation and with protection for his spouse if he died before her.

    Centrica are not likely to fail to deliver on the promise but if it did , Bob would get – as a pensioner – an equivalent pension from the PPF.

    Alternatively Bob could become a millionaire and manage his money as he saw fit.

    The choice is Bob’s – but it’s a very difficult choice for him to make. That’s why he should either stay in the scheme or pay for top-notch advice.

    I’m totally with John Lawson on this – he is not bleating on – he’s bang on the money.

  3. If the individual is intent on taking the TV, no amount of intervention from the regulator will stop them. Like it or not there will always be someone who will transfer it for them, at what cost only time will tell. But one thing is certain it will be the advisory community that will pay when the customers decides they made the wrong decision. What we need is for the customer to shoulder some of the blame for their insistence, this just might focus their minds at the start of the process, but I doubt this will ever be the case.

    • Totally agree. The regulator should be all over advisers who recommend transfers to ensure the advice is suitable. However if a client insists to proceed where the research and written confirmation from the adviser is to stay with the current scheme then they should shoulder ALL of the blame. They should not have any protection under regulations for being a total moron, end of story. However the FCA will never allow this to happen as they and the FoS need the advisers to blame when an idiot insist on doing something against advice. We must take the blame in the regulators eyes. The “You as an adviser should have known better than proceed with implementation instruction from your client” brigade are in the wings awaiting the start of the complaints arriving. You thing FSCS bills are bad now, wait until they start to pay out huge amounts of claims of the max they can.

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