David Fairs is urging for rule changes to allow more members of defined benefit (DB) pension schemes to benefit from pension freedoms.
Fairs brought to light the difficulties DB pension holders experience in achieving the same degree of freedom as DC pension beneficiaries.
Prior to changing their pension entitlements to a flexible DC scheme, people with DB pensions worth more than £30,000 are required by pension freedom law to obtain professional financial advice. Nevertheless, the availability of high-quality advice has decreased recently, while its price has dramatically grown as a result of growing adviser costs, such as professional indemnity insurance.
As a result, people with pension savings between £30,000 and £70,000 have had a difficult time finding inexpensive advice. According to Fairs, some customers have received outrageous quotes for guidance on moving a £35,000 pension that total thousands of pounds.
Additionally, those who want to transfer money are vulnerable to scammers, making it challenging for them to distinguish between reputable financial advisors and those wanting to take advantage of them. When advising companies use diverse charging strategies, it is difficult to compare expenses.
Fairs suggests two possible answers to these problems. The first approach entails the appointment of a selected group of certified transfer consultants by additional DB schemes. Due diligence would have been done on the firm, enabling members to employ these advisers with confidence.
The new advising arrangement’s setup expenses would be covered by the programme, but overall, members would pay less for assistance than they would if they went to independent financial advisers.
In order to implement the second solution, regulations must be changed to allow people with modest defined benefit (DB) pensions to access drawdown within their DB arrangement, either directly or through a chosen third party, such as a well-known drawdown provider or a future collective defined contribution (CDC) vehicle.
If the option is covered by the same DB arrangement, the necessity for regulated financial advice would be waived under this strategy, but advice would still be given. Trustees would be in charge of making sure that any third-party providers are authorised, that investment alternatives are appropriate, and that fees are fair.
This would be consistent with the current obligations trustees have under the most recent anti-scam laws when assessing possible transfers. Instead of completely leaving the trust, the suggested procedure would give members an easier experience while still protecting them from fraud and making expensive, inappropriate product choices.
Fairs says: “The current requirement on members to seek Financial Advice if their benefit is over £30,000, the transfer regulations and requirements to flag amber or red transfer requests and referral to MoneyHelper are sticking plasters on an ineffective process. It would be much better to start with a fresh look at the outcomes desired and design a process to get there. For members to put themselves through such a tortuous and expensive process clearly demonstrates that there is a need for flexibility beyond that currently offered by DB schemes”.