The “freedom and choice” reforms to UK pensions are giving individuals many more options in terms of how they access their pension savings. To ensure individuals make an informed choice, the accompanying legislation and guidance generally promotes the need for some form of financial advice to be obtained. Three examples of advice requirements have taken effect in recent months, but beware they are all different and in two of the three cases they are not even called advice!
- Guidance on converting small DB pension entitlements to cash. In the 2014 Budget it was announced that individuals would be allowed to convert as much as £30,000 worth of their Defined Benefit pension savings into a cash lump sum. Some employers have decided to go through a process of highlighting this option to all eligible employees. In December 2014, the Incentive Exercises Monitoring Board published a statement that, in its view, one off exercises of this kind (as opposed to “business as usual” activity) are an incentive exercise and subject to the Code of Good Practice. This means that employers are expected to provide employees with access to financial guidance (at the employer’s expense) before the offer can be accepted. This guidance is a watered-down version of regulated financial advice which must be provided by an FCA authorised adviser.
- Advice on transferring DB benefits to a DC arrangement. From April 2015, individuals wishing to transfer DB benefits (worth in excess of £30,000) to a Defined Contribution arrangement will need to take regulated financial advice. Irrespective of whether the transfer is to a different pension arrangement, or whether the transfer is to a different section of the same pension plan, trustees will need to do a small amount of due diligence to check that advice has been taken from a FCA authorised adviser.
- Guidance on flexible access to DC pension savings. Also from April 2015, employers and pension providers who are offering flexible access to DC pension savings (e.g. 100% cash lump sums) will need to signpost Pension Wise, the free and impartial government service that helps you understand your new pension options. Pension Wise, which can be accessed online, on the telephone or face to face through a Citizens Advice Bureau, provides guidance but won’t recommend any products or tell individuals what to do with their money. Guidance specialists are not authorised by the FCA.
Whilst the principle behind the need for advice is sound, the detailed requirements are so complicated that advice is probably needed on what advice is required!