Self-employed pension savers are not allowed to transfer a final salary pension

Experienced investors looking to manage their own retirement funds struggle to get transfer advice from independent financial advisors who won’t do business with them unless they also sign up for expensive ongoing services.

Pension savers are required to take financial advice when transferring a defined benefit pension fund (DB) in excess of £30,000. But some investors and industry professionals say IFA companies and insurers are creating roadblocks for investors trying to take full control of their pension funds.

“Institutions don’t like individuals (like me who are trained in finance) openly saying I want to manage my retirement myself,” a senior financial academic and experienced investor told FT Money. He reported a “harrowing” year trying to get an IFA to advise on a £900,000 defined benefit transfer.

“Consulting firms rarely take on a case if they know in advance that a client wants to manage their money.”

The benefits of switching include greater flexibility and better death benefits. There is no recent data on the number of people interested in this option, which is really only suitable for experienced investors. FT Money communicated with several readers highlighting “intimidating” challenges in getting the necessary advice.

The legal duty to seek advice was introduced in 2015 by the regulator who believes most people would be better off not giving up a valuable DB pension as it provides a fixed inflation-linked income upon retirement. compared to a more flexible but riskier plan based on stock market performance.

Ongoing advisor services after a transfer may include an annual assessment of changes in financial and personal circumstances, a review of the continued suitability of investments in the pot, and handling of tax issues.

But those who prefer to manage their retirement pot themselves can save on annual fees of typically 0.5 percent to 1 percent of the fund’s value. These add tens of thousands over the course of the retirement plan for the largest funds.

Transfer Obstacles

The reader said that for most people who don’t have a solid foundation in finance and investment, self-management would “not make sense.” “But for someone trained in finance and keeping abreast of markets and regulatory changes, it doesn’t make economic sense to hand over the reins of one’s wealth to a person with vested interests,” he said.

He is in his mid-sixties and manages his own £3 million portfolio, which includes other pension assets, as does Isas. He spoke with at least six companies, including Tilney, a large discretionary wealth management group, which he said turned him down outright because of his desire to manage his own pot.

Other companies would have required him to “jump through hoops” to have the pot invested according to his preferences. St James’s Place, the asset manager, said it would offer transfer advice but impose a 6 percent exit penalty on transfers from the fund in the first year.

“Most advisory firms insist on managing the funds because it’s their bread and butter – the initial advisory fee is nothing compared to the ongoing cost,” he said.

Andrew, an FT reader who asked for his full name to be withheld, sought a company to advise on a £700,000 DB fund transfer, which was eventually completed in 2020.

As a financially savvy person, he wanted to know if his workplace retirement offering, which offered a good selection of mutual funds, low management fees and a withdrawal facility, could be a suitable home for a transferred pot.

“A company [of chartered financial planners)] indicated that they would only provide the advice on the condition that I commit to transfer my DB fund to their own ‘preferred’ provider and pay an annual membership fee of nearly £3,000 per year on top of any fund and platform fees,” he said.

“An unspecified transfer fee would also have to be paid if I wanted to consolidate my existing defined contribution funds under the same provider.”

Andrew said another adviser had recommended a more expensive option than his retirement plan at work.

“Of the universe of available potential investment managers, they recommended a three-manager investment boutique, located in the same building as the IFA, that proposed levying combined annual investment fees almost a whole percentage point higher than the master trust that charged for funds on the ongoing basis. band,” he said.

Mark Turner, director of Kroll’s financial services compliance and regulatory practice, said these concerns are “increasingly common.”

“It’s now incredibly difficult, if not impossible, to get a reasonably priced DB transfer advice that’s not effectively wrapped up in some sort of ongoing management agreement,” Turner says.

Fees and costs

The FCA has estimated that fees of 0.5 to 1 per cent would reduce an average transferred pension pot of £350,000 each month by £145 to £290 in the period immediately following the transfer. Likewise, ongoing product costs from 1 percent to 1.5 percent would reduce it by an additional £290 to £440 per month. This would make a total deduction on a transfer value of £350,000 from £435 to £730 per month.

To highlight the impact of costs, the FCA analysis in 2020 estimated that a DB scheme with a transfer value of £350,000 could have a current income of £1,000 – £1,200 per month, so costs represent between 44 and 61 percent of the value.

Asked to respond to readers’ concerns, Tilney said: “We do not normally engage with clients seeking to manage their own investments, but investing with our advice in third-party funds or other professional investment management companies is possible.

“Our view is that the vast majority of consumers need the skills of professional asset managers to ensure their retirement fund has the best chance of meeting their needs,” said Tilney, where on-going advice rates range from 0, 3 percent to 1 percent per year. year.

Fidelity, which charges an annual advisory fee of 0.5 percent, said, “Any client wishing to use our services for advice on DB pension transfers should use our full advisory service, including the investments.”

Cameron James, an IFA firm that specializes in expat financial planning and charges a 1 percent annual fee, said it wouldn’t turn away a client simply on the basis that they wanted to manage their own money.

However, it added: “We prefer to work with long-term customers and, most importantly, have clear oversight of their transferred DB assets. We don’t want to be a ‘chop shop’.”

The company said clients “expressing a desire to manage their own portfolio” would be looked at on a case-by-case basis, depending on their investment experience.

St James’s Place did not respond to a request for comment.

In the past two years, the number of advisors offering pension transfer advice has fallen by more than 60 percent, with many IFAs forced out of the market by raising high professional liability premiums as insurers respond to mounting complaints about pension bad buys.

Turner said: “Advisers and their insurers are well aware of the potential regulatory risks associated with providing DB transfer advice and many have now concluded that such risks outweigh the commercial benefits of providing the advice. “

The Chartered Insurance Institute, the professional body for financial planners, said many advisors were reluctant to hire clients who didn’t want to stick to their recommended fund trajectory. “Over time, advisers have become more cautious,” said Matthew Connell, director of policy and public affairs at the CII.

Lady Ros Altmann, a former pensions minister who transferred a pension pot she managed, said she shared the concerns and frustrations of FT readers.

“It seems wrong that clients can’t just find independent advice that objectively assesses their current needs and, if a transfer is recommended, they can proceed after paying for the consultant’s time and expertise,” Altmann said.

“Most clients who switch can benefit from ongoing investment advice, but some don’t need it.”

Alternative options

The FCA requires advisors to view a company pension as a potential home for a transferred defined benefit fund, which may be a cheaper option for the average investor than a advised service with ongoing annual costs.

Speaking about the challenges for DIY investors in obtaining transfer advice, the FCA said, “Companies can choose which parts of the market they want to serve and define their own business models.”

However, the regulator added that when a consultant offered an ongoing service, it expected companies to be “clear from the outset” about the service they provide and the cost. It also requires companies to tell customers that they can unsubscribe from ongoing services at any time.

Do-it-yourself investors looking to manage their DB pension funds can continue to expect barriers and barriers to obtaining mandatory advice. However, Connell said one possible solution could be to require clients looking to manage their money to have their decision signed by a third party after the advisory process.

“We’ve now come to a point where it’s often professional indemnity insurers that set the bar for what kind of corporate IFAs do,” he said.

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