The new pension freedoms are finally here and, as both national and trade press have reported, there is huge interest in the drawdown flexibility and more favourable treatment of funds remaining on death. Much of this interest will come from members of defined benefit schemes who previously enjoyed neither the flexibility of income nor, in many cases, any return on death whatsoever.
Clearly for some scheme members the sentiment of the flexibility and possibility of retaining control of what can often be a substantial capital sum on their death will be quite compelling. However, crunching the numbers and looking at a like for like value of total benefits receivable or critical yield requirement will often result in a (quite correctly issued) negative recommendation from an adviser, whose advice will be required before such a transfer can take place. And herein lies the problem…
A client may approach their adviser and receive a negative recommendation but, armed with this information, still wish to make a transfer to a scheme facilitating the pension freedoms they find so attractive.
Increasingly, we are seeing networks banning their affiliates from transacting such business and compliance specialists referring to the process as potentially just too toxic.
The immediate solution would appear to be for a client to sidestep the adviser once advice has been given. A defined benefit scheme is required to receive evidence that the member has been provided with appropriate regulated financial advice in connection with the proposed transfer to a flexible drawdown scheme but it does not have to see the outcome of that advice. Indeed, provided it can check the regulatory permissions of the adviser involved, it is obligated to release the transfer as requested by the member.
The challenge facing the member will now be finding a pension provider that will accept the transfer. Standard Life, Fidelity and Sipp providers James Hay and Talbot and Muir are among those providers that have stated defined benefit transfers will be accepted only with a positive recommendation from a regulated adviser.
Surely there must be something wrong with a system where the threat of regulatory action is such that both advisers and pension providers are unable to transact a client’s instruction when they have clearly received information on which they should be able to make an informed decision. Has the Government manufactured a nanny state whereby its regulators and ombudsmen prevent the implementation of freedoms that it has itself created?
The situation is pertinent to the consultation released last month covering the proposed sale of annuities to a second hand market. The Government announced this as offering exactly the same freedoms to those who already have annuities in payment to those individuals now approaching retirement. What is an annuity if it is not a defined benefit, albeit one that is in payment rather than one that would come into payment from a defined benefit scheme?
Adopting the regulator’s TCF principle but substituting the middle acronym as ‘consumer’, then surely exactly the same advice requirements must be adopted as are in place for defined benefit transfers. The advice market for advisers in terms of annuity sale advice is likely, if anything, to be more specialist than pension transfer advice since the period of time that the annuity would be in payment will be determined by health assumptions. This, I fear, is a step too far for independent financial advisers to take.
So in its annuity sale consultation document, the Government outlined the necessity to consult on the levels of regulatory requirements to ensure the protection of the consumer (vendor) as well as the regulatory requirements of the adviser willing to advise on annuity sale and by logical conclusion an inability of a purchaser to buy without a positive recommendation.
The annuity sale proposal based on current trends is, therefore, doomed to failure unless a common sense solution to the transaction of business by a willing and educated consumer is permitted by regulated advisers and providers. And if this solution could be equally adopted for defined benefit transfers then the voting population might be able to take advantage of these political promises.
Martin Tilley is director of technical services at Dentons Pension Management