Pension transfers - particularly transfers from defined benefit (final salary) pension schemes to defined contribution arrangements - are an area where the FSA expects financial advisers to apply a high level of care.
The reason is straightforward: a defined benefit pension provides a guaranteed income for life, with inflation protection. A defined contribution pension provides a pot of money that can be invested, drawn from, or used to buy an annuity - but with no guarantee on the resulting income. Transferring from the former to the latter is a significant decision and is not appropriate for most people.
That said, there are circumstances in which a transfer may be appropriate: clients with health conditions that materially reduce life expectancy, clients with no spouse or dependent for whom the survivor's pension would matter, clients with very substantial other assets that mean the guaranteed pension income is not critical to retirement standard of living, or clients whose overall financial position favours flexibility over income certainty.
Pension transfer advice, where it is sought, is delivered with the additional care that the regulator expects. We complete a detailed analysis comparing the defined benefit and defined contribution outcomes, taking into account the client's full position, and we issue formal advice in writing.
Crucially, we recommend against a transfer in many of the cases where it is considered. Most defined benefit pensions are valuable and should not be transferred. Where we recommend against a transfer, the client can still proceed if they wish, but they do so contrary to our advice.
If you are considering a pension transfer or have been approached about one, please get in touch before taking any action.