The City watchdog has raised fresh concerns that thousands of consumers are being wrongly advised to cash in their defined benefit pension, putting them at greater risk of financial insecurity in old age.
The Financial Conduct Authority said the advice was handed out despite being unsuitable for most people who opt to take a lump sum by transferring to poorer-value stock market-linked schemes at the expense of a guaranteed income for life.
It surveyed firms that had provided advice between April 2015 and September 2018 on DB pensions worth a total of £82.8bn, with an average of value of £352,303, and found that nearly 70% – or 162,047 – had been advised to transfer out.
Under current rules, the only way someone with a DB pension can access a lump sum is by transferring to a less-coveted defined contribution (DC) pension scheme. Under DC schemes, returns are linked to the stock market rather than salary and holders cash out if they want to instead of taking an annuity.
“We have said repeatedly that, when advising on DB transfers, advisers should start from the position that a transfer is not suitable,” said Megan Butler, the executive director of supervision, wholesale and specialists at the FCA.
“It is deeply concerning and disappointing to see that transfers are still being recommended at the levels we have seen.”
The regulator surveyed 3,015 advisory firms and said it had already started visiting those most active in the market. It will also write to those where “the potential for harm” has been identified, outlining what action they should take.
Butler said: “Deciding whether to transfer out of a DB scheme is one of the most complex financial decisions a consumer may have to make and it is vital customers get high-quality advice. Our ambition is for pension transfer advice to reach the same standard as that of the rest of the financial advice market.”
