An introduction to abridged advice, for defined benefit pension transfers
It is estimated that about one-in-four employees in the UK have access to a defined benefit, or final salary, workplace pension 1. That’s more than six million people 2. This population has reduced in size since the turn of the century, as employers have increasingly provided the alternative defined contribution, or money purchase, style of workplace pension. But for the six million who continue to hold an open or deferred defined benefit pensions, they are typically of significant value.
The significant value of defined benefit pensions
Defined benefit pensions provide a near-guaranteed income in retirement, and often this income increases in line with inflation. They also often provide a guaranteed pension for dependents upon the pension holder’s death. These can be of significant value and therefore all defined benefit pensions should be handled with care.
The growth of defined benefit pension transfers
Over recent years, the UK has seen an increase in people transferring their pension savings away from defined benefit pensions. Despite the significant value referred to above, there are justifiable reasons for transferring. Alternative pension arrangements can provide more flexibility in retirement; they can provide an enhanced income if you are in ill-health; or they can provide greater options when it comes to inheritance planning.
These can be complex issues to consider. And given the significant value of many defined benefit pensions, it is strongly advised that the pension saver seeks regulated financial advice from a pension transfer specialist before progressing with a transfer. Indeed, it is a regulatory requirement that any scheme you are looking to transfer from, valued at more than £30,000.00, must seek regulated financial advice.
Regulated advice in this area is a specialist skill. This, combined with the often-significant amounts of money involved, means that this advice can come at a cost. Its value and the peace of mind is clear, but some have been put off due its higher associated costs. This has meant many have chosen not to proceed with advice, which means they haven’t been able to instigate the transfer.
The new abridged advice service
Positively, the regulator has responded to this issue, and has endorsed a new transfer service called “abridged advice”. This new service lies between the provision of introductory information and the provision of full advice, with its associated costs. Abridged advice can be seen as a ‘stepping-stone’ towards the provision of full advice, for those who are actively considering a transfer.
What does abridged advice entail?
To “abridge” means to “shorten”. And the new abridged advice service shortens what could otherwise be a long, and deep-rooted, full advice review and recommendation. Abridged advice will typically include the first steps of the full advice process only. This would include a fact-find, to understand the client’s current financial situation, and a risk assessment, to understand the client’s appetite and capacity for financial risk.
How does it differ from full advice?
Abridged advice stops short of making a recommendation for the next steps towards a full transfer. Instead, abridged advice is permitted to reach one of two conclusions. It can:
- Provide the client with a personal recommendation not to transfer or convert their pension, if the adviser judges such a transfer not to be in their interests
- Tell the client that it is unclear whether they would benefit from a pension transfer. If the client still wants to proceed with a transfer, the traditional full advice process must then be completed.
Given the shortened nature of the process, abridged advice will carry a reduced cost compared to that associated with full advice. But it should open more holders of defined benefit pensions to the fact that there is merit in considering this further.
Abridged advice is an optional service for regulated advisers to provide. It is not a mandatory service. But if your adviser does not provide this service, and you would like to consider it as an option, your adviser could direct you towards one who does provide this service.
When faced with increasing options for our pension savings, it is positive we are also being presented with increasing sources of help.
Advice from Aviva
If you don’t already have your own financial adviser and would like to speak to a specialist defined benefit adviser, Aviva Financial Advice can help.
Call 0800 158 2642*
Book a call back.
*For our joint protection, telephone calls may be recorded and/or monitored. Calls to 0800 numbers from UK landlines and mobiles are free.