Defined Benefit Transfer Fee Charging Rules 2020

The FCA has published its Policy Statement on final rules and guidance for Pension Transfer Advice (PS20/6).  This comes into effect from 1st October 2020.

In its simplest form it bans ‘contingent charging’ i.e. a financial adviser only charges a fee i.e. gets paid if a transfer proceeds. 

Or put it another way, if a transfer does not proceed, the financial adviser does not get paid despite the work that has been done so far.  The premise being that many financial advisers may lean towards recommending a transfer (to get paid) even if it is not in the client’s best interests.  This would be a poor consumer outcome and may lead to sub-standard advice.

For much of this, we agree, contingent charging in its purest form may lead to poor advice outcomes.

New Charging Rules – Charge the same for all outcomes and cannot be hidden behind % – needs to be in real numbers and also compared to an equivalent of the monthly pension e.g. equivalent to 6 months of pension income.

The new rules require that the same fee must be charged to a client whether the advice is to proceed with a transfer or not.  This absolutely removes any risk of consumer detriment as advisers will charge the same whether they advise you to keep the pension scheme or transfer it.

The adviser fee must be the same either way and then for the additional works of processing the transfer application, the adviser is not allowed to charge extra for processing (which we disagree with).

We believe that our approach, that we must now stop, for charging a State 1 fee for the technical advice and research (minimum £3,000) and then a stage 2 combined ‘Risk’ and processing fee (if a transfer proceeds – we must do the admin and our insurance costs will increase) is the fairest way.

Disadvantage

We believe this will disadvantage those clients where the advice is to keep your existing pension, as they are technically paying the same fee as those transfers that do proceed with additional processing works to be completed.

When can contingent charging still be used?  Known as ‘Carve Outs’

In specific circumstances where a consumer is more likely to benefit from advice and may be unable to afford non-contingent advice charges.  Serious Ill health (can self certify) – life expectancy below age 75 or serious financial difficulty e.g. evidence that you are regularly unable to meet mortgage payments, rent, utility and subsistence standard of living, unable to service debts and have missed payments in 3 of the last 6 months.

Our Amended Services:

Pre October 2020, we have 3 stages

• Stage 1 - Initial Consultation – Triage Guidance, no charge 30min consultation, Pension Transfer Gold Standard, Pension Transfer Questionnaire and our own Transfer Value Estimate

Stage 2 - Feasibility Stage full fact find, risk profile, scheme selection, fund selection, Appropriate Pension Transfer Analysis (APTA), Transfer Value Comparator (TVC) and report

• Stage 3 - Risk fee where we proceed to full advice report and implementation

From October 2020:  We still have 3 stages:

• Stage 1 - Initial Guidance/Triage Service – unchanged but not our own Transfer Value Estimate (or can discuss anyway)
• Stage 2 - Will become ‘Abridged Advice’ with own Transfer Value Estimate but no provider/fund and research, no APTA or TVC but includes written report if not to proceed to full advice and keep scheme and to not to proceed to full advice or unclear/positive where they may wish to proceed to full advice
• Stage 3 - Full Advice will include provider, funds, APTA, TVC and application (if any) or advice is not to proceed -  full, written report

Stage 1 - Triage Guidance (not advice) – no charge 30min consultation, PT Gold Standard and PTQ

To educate, to put you in a more informed position as to whether you are suitable to proceed to the two stage advice process

Stage 2 - Abridged Advice – Fixed Fee – full fact find, risk profile, PRAD and report

No APTA or TVC, No scheme or fund recommendations.

Must consider risks of staying in the scheme v risks to transferring and losing the benefits.

This can only result in:

• Personal recommendation to keep scheme or
• Unclear as to whether would benefit or not and whether to proceed to full advice

Adviser cannot sign advice declaration form to say they have given advice nor get involved/assist in any transfer conversion unless they have given full advice i.e. stage 2

Stage 3 - Full Advice – Minimum fee subject to % size of transfer value – further research, report, APTA, TVC based upon pension provider and fund recommendation and risk fee taken on

Where advice is unclear and fuller analysis, cash flow modelling (in real terms too), adding our cash flow projections and expense projections to model based upon our own 0% no growth and 5% pa growth assumptions.

Outcomes:

• Still could be advised not to transfer.
• Transfer advised with application and implementation

A full written report is still required at the end of stage 3.