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Experienced investors seeking to manage their own pension funds are struggling to secure transfer advice from independent financial advisers who will not do business with them unless they also sign up for costly ongoing services.
Retirement savers are obliged to obtain financial advice on transferring a defined benefit (DB) fund of more than £30,000. But some investors and industry professionals say IFA firms and insurers are creating roadblocks for investors trying to take full charge of their retirement funds.
“Institutions do not like individuals (like me who are trained in finance) openly stating that I would like to manage my pension myself,” a senior finance academic and experienced investor told FT Money. He reported a “harrowing” year trying to secure an IFA to provide advice on a £900,000 defined benefit pension transfer.
“Adviser firms rarely would take a case if they know in advance that a client would like to manage their funds.”
The attractions of transferring out include greater flexibility and better death benefits. There is no recent data on the numbers of people interested in pursuing this option, which is really suitable only for experienced investors. FT Money communicated with several readers who highlighted “intimidating” challenges in trying to secure the necessary advice.
The legal duty to seek advice was introduced in 2015 by the regulator, which believes most people are better off not giving up a valuable DB pension, since it delivers a fixed, inflation-linked income in retirement, compared with a more flexible but riskier plan based on stock market performance.
Ongoing services provided by advisers after a transfer could include an annual review to consider changes to financial and personal circumstances, a check on the continued suitability of investments in the pot and to manage tax issues.
But those who prefer to self-manage their pension pot can save on annual fees of typically 0.5 per cent to 1 per cent of the fund’s value. These add tens of thousands over the course of the retirement plan for the largest funds.
Transfer hurdles
The reader said self-management would not “make sense” for most people who do not have a solid grounding in finance and investment. “However, for a person trained in finance who keeps abreast of the markets and changes in regulations, it does not make economic sense to hand over the reins of one’s assets to a person with vested interests,” he said.
Aged in his mid-sixties, he manages his own £3mn portfolio, including other pension assets, as well as Isas. He spoke to at least six firms including Tilney, a large discretionary investment management group, which he said rejected him outright due to his wish to manage his own pot.
Other firms would have required him to “jump through hoops” to get the pot invested according to his preferences. St James’s Place, the wealth management firm, said it would offer transfer advice but would levy a 6 per cent exit penalty on transfers out of its fund in the first year.
“Most adviser companies insist on managing the funds as it constitutes their bread and butter — the initial advisory fees are nothing compared to the ongoing charges,” he said.
Andrew, an FT reader who asked for his full name to be withheld, sought a firm to provide advice on a £700,000 DB fund transfer which eventually concluded in 2020.
A financially savvy individual, he wanted views on whether his workplace pension, which offered a good selection of investment funds, low management fees and a drawdown facility, might be a suitable home for a transferred pot.
“One firm [of chartered financial planners)] indicated that they would only provide the advice on condition that I commit to transfer my DB fund to their own ‘preferred’ provider and incur an annual membership fee of almost £3,000 a year in addition to any fund and platform charges,” he said.
“There also would be a further unspecified transfer fee payable if I wanted to consolidate my existing defined contribution funds under the same provider.”
Andrew said another adviser had recommended a more expensive option than his workplace pension plan.
“Of the universe of potential investment managers available they recommended a three-manager investment boutique, based in the same building as the IFA, that was proposing to levy combined annual investment fees almost a whole percentage point higher than the master trust were charging for funds in drawdown,” he said.
Mark Turner, managing director in Kroll’s financial services compliance and regulation practice, said these concerns were becoming “increasingly common”.
“It is now incredibly hard, if not impossible, to obtain sensibly priced DB transfer advice that is not effectively packaged up with some kind of ongoing management arrangement,” said Turner.
Fees and charges
The FCA has estimated that fees of 0.5 to 1 per cent would reduce an average transferred pension pot of £350,000 by £145 to £290 each month in the period immediately after transferring. Similarly, ongoing product charges of 1 per cent to 1.5 per cent would reduce it by a further £290 to £440 each month. This would see total deductions on a transfer value of £350,000 of £435 to £730 each month.
To highlight the impact of charges, FCA analysis in 2020 estimated a DB scheme with a £350,000 transfer value might have a current income value of £1,000-£1,200 a month, so the charges represent between 44 per cent and 61 per cent of the value.
Asked to respond to readers’ concerns, Tilney said: “We do not typically engage with clients who want to manage their own investments, but investing with our advice into third-party funds or other professional investment management companies is possible.
“Our view is that the vast majority of consumers require the skills of professional investment managers to ensure that their pension fund has the best chance of meeting their needs,” said Tilney, where ongoing advice rates range from 0.3 per cent to 1 per cent a year.
Fidelity, which charges a 0.5 per cent annual ongoing advice fee, said: “Any client wishing to use our services for DB pension transfer advice must use our full advisory service, including the investments.”
Cameron James, an IFA firm which specialises in expat financial planning and levies annual fees of 1 per cent, said it would not reject a client purely on the basis that they wished to manage their own funds.
However, it added “we prefer working with clients over the long term and more importantly having clear oversight of their transferred DB asset. We do not wish to be a ‘chop shop’.”
The firm said clients “expressing a desire to manage their own portfolio” would be considered on a case-by-case basis, depending on their investment experience.
St James’s Place did not respond to a request for comment.
Over the past two years, the number of advisers offering pension transfer advice has plunged by more than 60 per cent, with many IFAs pushed out of the market by soaring professional indemnity premiums, as insurers react to rising pension mis-selling complaints.
Turner said: “Advisers and their insurers are well aware of the potential regulatory risks associated with providing DB transfer advice and many have now concluded that such risks outweigh the commercial benefits of providing the advice.”
The Chartered Insurance Institute, the professional body for financial planners, said many advisers were reluctant to take on clients who did not wish to stick with their recommended fund route. “Over time, advisers have become more cautious,” said Matthew Connell, policy and public affairs director at the CII.
Lady Ros Altmann, a former pensions minister who transferred a pension pot which she manages, said she shared the concerns and frustrations of FT readers.
“It seems wrong that clients cannot just find independent advice which assesses their current needs objectively and, if a transfer is recommended, they can go ahead after paying for the adviser’s time and expertise,” said Altmann.
“Most clients who transfer can benefit from ongoing investment advice but some don’t need it.”
Alternative options
The FCA requires advisers to consider a workplace pension as a potential home for a transferred defined benefit fund, which may be a less expensive option for the average investor than an advised service with ongoing annual charges.
On the challenges for DIY investors in obtaining transfer advice, the FCA said: “Firms can choose which parts of the market they are prepared to service and determine their own business models.”
However, the regulator added that when an adviser offered an ongoing service, it expected firms to be “clear from the outset” about the service they were providing as well as cost. It also requires firms to tell clients that they can opt out of ongoing services at any time.
Do-it-yourself investors hoping to take charge of their DB retirement funds can continue to expect blocks and barriers in securing compulsory advice. However, Connell said a potential solution may be to require clients who want to manage their funds, to have their decision signed off by a third-party after the advice process.
“We’ve got to a point now where often it is professional indemnity insurers who are setting the bar as to what kind of business IFAs do,” he said.
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