The FCA rules are under review, but they have published a guidance consultation on the redress for unsuitable transfer advice, which would see the compensation amount rise by between 5 per cent and 30 per cent, depending on the term to retirement.
This amounts to the cart being placed before the horse, but has been done because the FCA is more concerned about current compensation for historic advice than the adequacy of current rules in the light of pension freedoms.
However, the FCA is reviewing the quality of current advice in this area to inform what, if any, changes will be made to COBS 19.
In the meantime, a good reference point is the Personal Finance Society (PFS) Good Practice Guide, which highlights points to focus on under the following headings:
1. Understand the scheme.
2. Fully assess hard and soft facts.
3. Consider the wider tax issues with the client.
4. Ensure DB transfer matches client’s attitude to risk.
5. Analysis of client’s retirement income needs.
6. Analysis of sustainability of income.
7. Clear capital requirements.
The full text includes some good examples, but I would highlight the following practical steps advisers can take to help clients reach the right outcomes and protect themselves:
• Use lifetime cash flow analysis, using reasoned and reasonable assumptions, to demonstrate how the invested funds will or will not meet the client’s expenditure requirements. Ideally this should include stress testing of the investment strategy to incorporate the sequencing risk of returns, as well as absolute returns.
• If a key driver for the transfer is death benefits or other inheritance tax planning, consider whether additional life assurance might meet the need while preserving the ‘secure’ income benefits.
• Confirm whether or not a partial transfer is possible and, if so, consider this in the model.
• Consider carefully the investment policy with the client at outset. This might include the possibility of annuitisation of some or all of the remaining pot.
• Avoid contingent fees to mitigate potential transaction bias. DB transfer business is complex, high risk and irreversible, so fees should reflect the work done rather than the outcome.
• Above all, ensure that you understand the client's objectives and what a good retirement looks like for them, then work with their available assets – that is, not just the pension – to ensure their money works to support this. Remember that the single-tier state pension will take account of contracting out, so the client may not be entitled to the full amount.
