- Six years ago, pension independence was introduced with great fanfare
- Provides savers the opportunity to work with their retirement savings as per their choice
- Financial advisors are leaving the pension transfer market in large numbers
- Do you need help fixing your finances? Find a Financial Advisory Service
Hundreds of thousands of savers are unable to access their pension pot due to a lack of affordable, quality advice.
Six years ago, pension independence was introduced with much fanfare, giving savers an opportunity to do whatever they want with their retirement savings.
But today, pension experts warn that instead of finding freedom, savers with defined benefit pensions may be trapped in a plan that doesn’t suit them, leaving them without the financial flexibility they crave in old age. Huh.
Defined benefit pension plans were once offered by most employers and provide plan members with a guaranteed income upon retirement – calculated on a mix of years worked and final pay.
Cash grab: Savers with defined benefit pensions now need to seek financial advice before being able to enjoy pension freedom
In contrast, pension from a defined contribution plan, which is now the mainstay of pensions for many, is dependent on the amount contributed and the investment success of the plan.
Savers with defined benefit pensions now need to seek financial advice before being able to enjoy pension freedom.
However, a deliberate crackdown on consultants in the wake of the British Steel scandal, in which many employees were advised to transfer their pensions against their best interests, means the number of good quality consultants is also dwindling.
Steve Lowe, a director at retirement specialist Just Group, warns that access to high street advisors who provide quality pension transfer advice is ‘on the way to oblivion’.
He adds: ‘It is a threat to the freedom of pension – it cannot be maintained as a policy unless something changes.
‘This is becoming increasingly challenging for those who legitimately want to consider converting their defined benefit pension to a more flexible pension.’
Why is the system going wrong?
Defined benefit pensions are the most generous of pension plan regimes and most savers would be wise to hold on to them.
But there are some circumstances in which moving from a defined benefit pension to a plan that provides access to your full nest egg can make good financial sense.
Savers with defined benefit pensions must receive financial advice before being able to enjoy pension freedom – but that advice is becoming increasingly difficult to access
Savers in poor health, those looking for greater financial flexibility, or those looking to pension their loved ones are among those for whom relocation makes sense, though not always.
In some cases, defined benefit pension plans offer members life-changing amounts — called transfer values – hundreds of thousands of pounds to take them off their books.
Savers are prohibited from receiving a defined benefit pension of £30,000 or more without first obtaining financial advice.
This is to prevent anyone from paying a valuable pension without fully understanding what it’s worth and before checking that it’s the right move for them.
However, as the number of advisors offering this type of advice is dwindling, savers have fewer options.
The number of specialists working in this major financial sector has grown to about 1,500 since the end of 2018.
Worryingly, one in three remaining are unsure whether they’ll provide advice in a year’s time, according to recent research by financial advisor Lane Clark & Peacock (LCP) and insurer Aviva.
Why is it so hard to give good advice?
Financial advisors are leaving the pension transfer market in large numbers. Aviva and LCP questioned more than 200 advisors who offered — or recently turned — pension transfer advice.
The most common problem cited was the rising cost of professional indemnity insurance, which covers consultants if a client later claims they were given poor advice and seeks compensation. The cost of this insurance has gone through the roof in recent years.
Alistair McQueen, head of savings and retirement at Aviva, warns that small advisory firms in particular have been hit by rising costs.
Forced out: Financial advisors are leaving the pension transfer market in large numbers thanks to the skyrocketing cost of professional indemnity insurance
He adds: ‘There are some firms that have been advising in this market for years and have never received any complaints or approvals.
‘Nevertheless, because insurance costs have multiplied, they have been forced to leave. This is not a good result, as consumers no longer have access to that good advisor.’
Other reasons for the advisors being ousted include the regulator’s perceived hostility towards the transfer and restrictions on contingency fees, meaning that members will now have to pay for advice whether or not they proceed with the transfer. It has acted as a deterrent.
What does this mean for savers?
Savers face rising costs and fewer options. Those who decided to transfer in the past year faced record fees after the transfer, new data from pension administrator XPS found.
The upfront cost for the transfer to the largest pension pot can be anything up to £20,000.
Savers especially with smaller utensils may find the cost of relocating unreasonable or unaffordable, leaving transfers open only to the wealthiest. McQueen worries that faced with some choices, some…