With increased options at retirement for pension customers, there are now also more sources of guidance and advice. The Financial Conduct Authority recently approved the introduction of a new abridged advice service for people considering a transfer from a final salary (defined benefit) pension.
The value of defined benefit pensions
It’s estimated that about one in four employees in the UK have access to a defined benefit workplace pension (also known as final salary pensions) 1. That’s more than 6 million people 2. This number has reduced in size since the turn of the century, as employers have increasingly provided the alternative defined contribution style of workplace pension (also known as money purchase pensions). But for the 6 million who continue to hold an open or deferred defined benefit pension, they are typically of significant value.
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 dependants 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 their significant value, there can be 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 anyone looking to transfer a defined benefit pension valued at more than £30,000 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 the advice can come at a cost. Its value and the peace of mind is clear, but some people have been put off due its cost. This has meant many have chosen not to proceed with advice, meaning they haven’t been able to instigate the transfer.
New abridged advice service
Positively, the Financial Conduct Authority has responded to this issue and 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 full advice for people who are actively considering a transfer.
What does abridged advice involve?
To abridge means to shorten. And abridged advice services shorten what could otherwise be a long and deep-rooted full-advice review and recommendation. Abridged advice will typically only include the first steps of the full-advice process. This would include a fact-find, to understand the pension holder’s current financial situation, and a risk assessment to understand their 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 a personal recommendation not to transfer or convert the pension, if the adviser judges such a transfer not to be in the pension holder’s interests; or
- Tell the pension holder that it is unclear whether they would benefit from a pension transfer. If they still want to proceed, the traditional full-advice process must then be completed.
Given the shortened nature of the process, abridged advice costs less than full advice. But it should open more defined benefit pension holders to the fact that there is merit in considering this further.
Not all financial advisers offer an abridged advice service. If your adviser doesn’t provide abridged advice and you would like to consider it as an option, your adviser could direct you towards one who does provide the service. If you don’t have an adviser, we could help put you in touch with one.