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DB pension transfers into SIPPs – what you need to know (updated)

Elaine Turtle, director, DP Pensions advises on what advisers need to be wary of with transfers from defined benefit schemes and safeguarded rights to SIPPS

Many providers have changed their stance on transfers recently, this is partly due to the new pension freedoms and changes the FCA have made to the permissions needed to advise on pension transfers.

In April this year, the Government brought in their new Bill for pension freedoms which was welcomed by the industry. In the run up to April there were lots of articles in the press and huge interest by consumers, but what was not always made clear was that these new rules did not apply to defined benefit occupational schemes (DB Schemes) and the FCA brought out rules to make sure people were not encouraged to transfer out of DB schemes without taking the correct advice. This was really important as those approaching retirement would make decisions based on the new rules, but not always be aware of the benefits they were giving up. The majority of consumers don’t understand what their DB schemes provide and the guarantees within the contracts.

This was also extended to safe guarded benefits as well. Safeguarded benefits are defined as benefits other than money purchase or cash balance benefits. This means defined benefits, guaranteed pensions including guaranteed annuity rates (GARs) and guaranteed minimum pensions (GMPs).

How this affected advisers

Advisers now need the permission of ‘advising on pension transfers and opt outs’ to be able to give advice on pension transfers and conversions of safeguarded benefits. There is not a new permission and there are not two permissions.

Before the new pension freedoms came in, all transfers from occupational schemes to personal pension schemes required the permission of ‘advising on pension transfers and opt outs’.

A previous ‘loophole’ in the pension transfer guidance was that where benefits being transferred were immediately crystallised, the transfer conceivably fell outside of the pension transfer requirements. This is no longer the case even where safeguarded benefits are to be immediately crystallised they will fall within the new rules.

In April, with the new freedoms the FCA introduced a new regulated activity in addition to the existing one called – advising on conversions or transfers of safeguarded to flexible benefits.

The definition of a conversion is:

• Conversion of safeguarded benefits into flexible within the same scheme and

• Payment of UFPLS in respect of safeguarded benefits.

The FCA didn’t make the new regulated activity a new permission, but encompassed it in the existing permission of ‘advising on pension transfers and opt-outs’ and firms must have this to be able to carry on the new regulated activity.

Firms holding the permission of ‘advising on pension transfers and opt-outs,’ as at 6 April 2015, had their permission grandfathered so they are automatically able to advise on the new activity of conversions and transfers of safeguarded to flexible benefits.

There are circumstances where a pension transfer specialist is required and where a transfer value analysis report is needed (if the client is not immediately taking benefits). Advisory firms in the past have outsourced this type of pension transfer advice to a “specialist” whilst still retaining the client and so we may see a rise in these types of specialist firms.

Different provider stances

As usual there are different stances from providers – some are being relaxed and some are taking a strong stance based on the FCA guidelines. Most providers will only accept transfers from occupational pension schemes or schemes containing safeguarded benefits where the transfer is being made on the basis of a recommendation from an FCA regulated financial adviser regardless of the fund size.

There is also now a requirement on the ceding scheme to identity if the pension contains safeguarded benefits and to make sure advice is taken upon transfer. This might help put the receiving scheme providers at ease as the checking is done before the transfer although some of these providers will ask for a copy of this evidence that advice has been received by the member. Financial advisers are expected to take notice of this requirement although the FCA did not feel the need to impose additional requirements on advisory firms in this regard.

This means that some providers who have direct clients that contact them wishing to transfer defined benefit schemes into a SIPP will now tell those clients that they need to take advice before they can proceed if the value is more than £30,000. Obviously a lot of clients do not think they need advice, or are not willing to pay for the advice, but if that is the stance of the provider then the transfer will not happen without advice.

Some providers are actually asking to see the transfer value analysis report and the suitability letter issued by the financial adviser and will want to know it is a positive recommendation. Any information provided by the financial adviser to the provider will of course be kept confidential.

For advisers, therefore, it is always best to check with the SIPP provider used for a DB scheme transfer to find out first what they will require so you can make sure the transfer goes through as smoothly as possible.

Visit the DP Pensions website

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