On Wednesday 21st June, the Financial Conduct Authority published a consultation paper on ‘Advising on Pension Transfers’. One of our Pension Transfer Specialists, Lewys Richards, writes about the impact this will have on our clients.



When it comes to transferring a final salary pension, the FCA has very strict requirements. The current guidance is as follows [COBS 19.1.6]:

“…a firm should start by assuming that a transfer, conversion or opt-out will not be suitable. A firm should only then consider a transfer, conversion or opt-out to be suitable if it can clearly demonstrate, on contemporary evidence, that the transfer, conversion or opt-out is in the client’s best interests.”

The purpose of these strict requirements is to emphasise how valuable the guaranteed benefits within a final salary pension truly are. When considering a transfer, it is of utmost importance that the client fully understands the risks involved.

However, this guidance was written pre-Pension Freedoms. At the time, it was the norm for most retirees to purchase an annuity and receive a guaranteed income for the rest of their life. In that respect, a final salary pension usually offered better rates than available through any annuity provider. Then came the Pension Freedoms in April 2015 that completely changed the pension landscape. Sales of annuities are lower than ever as individuals instead turn to Flexi-Access Drawdown, accepting investment risk in return for income flexibility and improved death benefits.

Because of this momentous change in retirement preference, the regulator has published a Consultation Paper proposing changes to the regulation of final salary pension transfers. The Paper had 3 main areas of consultation:


1. The Suitability of Advice

The key change proposed regarding the suitability of pension transfers is the removal of the assumption that it is unsuitable to transfer until proven otherwise (see above). The FCA proposes to replace the statement in the Handbook with a statement saying that “for most people retaining safeguarded benefits will likely be in their best interests”. They also state that an assessment of suitability should be assessed on a case by case basis from a neutral starting position.

This illustrates how a guaranteed income is still likely to be in the best interests for most clients, however the guidance gives fair consideration to the advantages of flexibility – for some cases. Due to the Pension Freedoms, options at retirement are far less black and white.


2. Analysis to Support Advice

Because of the wider range of options now available at retirement, the FCA also proposes to change the way in which we analyse the benefits of a transfer. Currently, the requirement for every pension transfer is to complete a Transfer Value Analysis (TVA), which provides us with the Critical Yield*. Because the Critical Yield has such a focus on matching the scheme to an annuity, the FCA is proposing to replace the TVA with Appropriate Pension Transfer Analysis (APTA). As we understand at this point, the APTA will focus heavily on cashflow modelling, illustrating the sustainability of income via the different options available. The APTA will also include an element that is similar to the current Critical Yield calculation**. Fortunately, most firms that currently enact pension transfers (including ourselves) already include cashflow modelling in their research and justification, and so this proposal should be straightforward to incorporate.


3. Insistent Clients

The final discussion point in the Consultation Paper was on ‘insistent clients’. An individual has the right to receive advice but choose to proceed against the advice; this would be known as an ‘insistent client’. However, the adviser has the final say on whether they personally will transact the client’s wishes. Because of issues surrounding liability and regulation of ‘insistent clients’, many advisers will not transact. This is causing an issue for certain individuals who wish to transfer their pension but cannot find an adviser to transact it for them. The FCA seeks to clarify the position and definition of ‘insistent clients’ to make advisers feel more secure to proceed in this area, while also protecting the consumer from unscrupulous individuals.


How will this affect our clients?

The first thing to note is that this is only a Consultation Paper. The FCA are looking for industry experts to reply to the paper in response to the proposals. Nothing seen in this Paper will be written into regulation until at least early next year.

This means that for the time being, we proceed on the same basis that we currently use when approaching pension transfers. That is, that it is unsuitable to transfer unless there is evidence that proves otherwise.

If all proposals go ahead as written in the Consultation Paper, our clients will see very little change in our process. Our research already includes all recommendations proposed in the paper. The removal of the assumption that a transfer is unsuitable is unlikely to have a strong effect on our judgement on whether to transfer. We will continue to recommend what we believe is in the client’s best interest.

If you have any questions or concerns regarding anything in this blog or in the FCA Consultation Paper, please contact us. If you have a final salary pension that you have not recently discussed with one of our advisers, we encourage you to arrange an appointment with an adviser to review your finances and ensure that you are best positioned for retirement.


* Critical Yield is the annual investment return required in order to purchase an annuity to provide benefits of equal value to the estimated benefits provided by the existing scheme at retirement.

** Currently proposed to be called the Transfer Value Comparator (TVC). Whereas the Critical Yield calculates the return required to achieve scheme benefits based on the transfer value provided, the TVC will instead calculate the required starting amount to achieve the scheme benefits, given a prescribed rate of return based on attitude to risk.