Final salary pensioners face a shrinking pool of professionals willing to give vital financial advice.
Savers seeking final salary pension advice risk running into the arms of fraudsters, experts warn, because up to half of professional financial advisers are pulling out of the market.
Defined benefit (DB) transfers allow over-55s access to a lump sum rather than an income from their final salary pension, but only after getting regulated financial advice, if a pension is worth more than £30,000.
Pension transfers have become increasingly controversial, as financial watchdogs have warned that too many people get unsuitable advice to transfer, and have tightened the rules for advisers who provide the service.
Large sums are often involved. In the second quarter of this year, the average transfer value rocketed to well over half a million pounds – an increase of 30% on the previous three months, according to data from pension consultants LCP.
Up to half of financial advisers are now planning to refuse to carry out final salary pension advice to avoid censure by the regulators, high professional insurance costs, and potentially huge compensation claims.
Joint research by insurer Royal London and LCP of 500 DB pension advisers found nearly half considering pulling out of the market by this time next year.
Steve Webb, partner at LCP and former pensions minister, says: “With more advisers pulling out of the market, pension members are likely to find it increasingly difficult to source any advice, especially if they have relatively small pensions.”
It is already very hard for members of the public to tell if the adviser they have found is high quality or offers good value, he said.
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“If pension schemes do not step in to help savers find high-quality and impartial advice, there is a risk they could find themselves in the hands of less reputable advisers,” Webb warned.
A rule change being introduced next month is expected to push even more advisers out of the pension transfer market and leave consumers who need help with fewer options.
From 1 October, financial advisers will no longer be able to offer clients the option to pay only if they go ahead with a recommended pension transfer, known as contingent charging models.
The ban is being brought in by the Financial Conduct Authority (FCA) to avoid any conflict of interest that could encourage advisers to recommend unsuitable pension transfers in order to get paid.
There were 1,965 firms offering pensions transfer advice in July this year, according to the FCA.
Rather than individual pension holders trying to get advice from one of these firms directly, LCP and Royal London are calling for DB pension schemes to vet and appoint regulated advisers to advise their members, and subsidise the cost.
It also wants more schemes to offer “partial” DB transfers as an alternative to the all-or-nothing transfer option that many over-55s currently face.
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Justin Corliss, of Royal London, says: “Deciding whether to transfer out of a DB pension is a huge decision, and scheme members should be able to access affordable, impartial advice.
“Urgent action is needed to make sure that all members can access the expert advice they need.”
Keith Richards, chief executive of the Personal Finance Society, a trade body for financial advisers, said that without a “government-backed temporary alternative” to advisers’ indemnity insurance, consumers risk a repeat of the British Steel pension transfer scandal.
About 8,000 members transferred out of the British Steel pension scheme in 2017, with transfers collectively worth about £2.8 billion, but many were targeted by unregulated and unscrupulous advisers who lost their money in a series of scams and high-risk schemes.
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