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Advising on Pension Transfers - FCA expectations

6th Feb 2017

The FCA has sent a communication to advisers on their expectations for transfers.  Link here.

 

Essentially in their new Transfer Value Analysis guidance the FCA has just confirmed their existing approach.  The emphasis they place on linking any transfer advice to the assets into which the transfer will ultimately be invested should already be part of all proper advisory processes.  When analysing a transfer it has always been essential to understand the ultimate investment, as that defines the charges which must be embedded with any transfer value analysis calculation.  Before any transfer takes place a Key Features Illustration (KFI) must be produced which not only must provide an illustration using a realistic growth rate for the chosen asset, but again also reflect the appropriate charges.

 

 

It is unfortunate that the FCA has not taken this opportunity to extend their definition of the types of critical yield that must be provided as part of a TVAS but now it is becoming increasingly the case that a full TVAS report shows critical yields which both fulfil the FCA rules that a critical yield assuming annuity purchase at retirement must be shown but then go further and show critical yields assuming the customer goes into some form of drawdown (as most retirees are now doing).

 

 

It is clear that more and more people with defined benefits are wishing to explore the opportunities provided by Pension Freedoms, and when they do it is also essential that any transfer ends up being invested in assets that are for a prospect of a real rate of return.  One of the major problems facing the industry at present it that too many of those at retirement either take the money and leave it in a building society, or invest in “safe” assets, which are anything but!  It is a major problem in the industry that too many consumers fail to understand that a safe investment generally means a reduced annual purchasing power due to the effect of inflation.  The consequence of this is the FCA rightly concentrates on the probability of the possibility that people will be enticed into investment scams, this is a part of the chase for realistic returns.  Steps to control this aspect of the industry are welcome but not at the expense of making it more difficult for those with genuine reasons to transfer from defined benefit schemes.

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