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Pension transfer costs soar after 60% of advisers quit

The government says it is working “closely” with the financial regulator to address concerns about soaring costs of pension transfer advice after the number of advisers plunged by more than 60 per cent in three years.

John Glen, economic secretary to the Treasury, made the remarks after he was pressed by a Liberal Democrat MP on what discussions he had had with the Financial Conduct Authority (FCA) on the availability of qualified defined benefit (DB) pension transfer advisers.

Glen said in a written answer: “The FCA and the government believe that it is vital consumers receive suitable advice in this market, considering the long-term financial implications of a pension transfer, and continue to monitor the situation closely.”

Access to pension transfer advice has become a problem for individuals considering swapping their future-guaranteed DB pension for a cash lump sum today.

The FCA’s view is that most people should not be transferring their DB pension, which provides a secure retirement income, but record-high cash transfer offers have tempted more to obtain financial advice on the move. It is a legal requirement for those with pension pots worth more than £30,000.

In recent years, the pool of professional firms providing specialist DB advice has shrunk from about 3,000 in 2018 to 1,160 as of February this year, according to new figures released by Glen this week in a response to a written question from Daisy Cooper, a Lib Dem MP.

Glen acknowledged that interventions by the FCA to improve the standard of pension transfer advice, including taking enforcement action, had contributed to an increase in advice costs as advice firms subsequently faced increases in their complaints’ insurance premiums. “Some firms are choosing not to offer pension transfer advice and others are charging more, due to the cost of the insurance premiums,” said Glen.

He added the level and structure of advisory fees was a “commercial decision for advisers and the FCA do not have a remit from Parliament to regulate the way in which financial advice firms price their services”.

Matthew Connell, director of policy and public affairs for the Personal Finance Society, said that since the introduction of pension freedoms reforms in 2015, the cost of defined benefit pension transfer advice had increased.

“Access to affordable defined benefit pension transfer advice has been reduced in recent years and will result in people who must take regulated advice to be able to exercise their rights under pension freedoms struggling to do so.”

Since October 2020, advisers are no longer able to vary the charge for transfer advice depending on whether or not the transfer goes ahead, or a practice known as contingent charging, subject to some exceptions.

In practice, this means those seeking transfer advice will typically find themselves having to pay upfront fees which could mount to thousands of pounds, even if the recommendation is not to transfer.

Market analysis conducted last year by LCP, the actuarial consultants, and Aviva, an insurer, found that transfer advice fees were “much higher” than the £3000-£4000 fees the FCA estimated a client would pay after contingent charging was banned.

The analysis found some firms were levying fixed fees for advice of £3,000 to £10,000, though Aviva had found fees up to £20,000. Many advisers had a ‘hybrid fee model’, for example charging a fixed fee of £3,000-£4,000 plus 1 per cent of the transfer value, found the analysis. In the case of a £300,000 transfer, the total fees to be paid could reach £6,000-£7000.

Sir Steve Webb, partner at LCP, said it was becoming “increasingly difficult” for pension scheme members to source affordable, impartial, high-quality transfer advice.

“Rather than leave individuals to source their own advice online or from word of mouth, a much more efficient approach is for schemes to appoint an IFA available to advise members on transfers and other issues,” suggested Webb.

“This can be more efficient for the scheme, more cost-effective for the member and provides assurance that the advice is being provided by a firm which has been properly checked out and whose performance is monitored on an ongoing basis.”

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