We recently reviewed a pension transfer report where the client was recommended to transfer out of the defined benefit scheme into the client’s pre-existing SIPP. We considered that the recommendation to transfer appeared to be appropriate.
However, the client had what the FCA calls an ‘available qualifying scheme’, more commonly referred to as a workplace pension. The existence of that qualifying scheme meant that the adviser had an obligation under COBS19.1.2B to compare the proposed destination plan, namely the pre-existing SIPP with the default arrangement of the qualifying scheme …
“… where the proposed arrangement is a personal pension scheme, stakeholder pension scheme or defined contribution occupational pension scheme that is not a qualifying scheme, and a qualifying scheme is available to the retail client, compare the benefits and options available under the proposed arrangement with the benefits and options available under the default arrangement of the qualifying scheme …”
… and to implement any transfer to the qualifying scheme unless the SIPP could be clearly shown to be MORE suitable. The suitability guidance in COBS 19.1.6 states that firms:
- should start by assuming that it will not be as suitable as a transfer to the default arrangement of an available qualifying scheme; and
- will need to be able to demonstrate clearly that, as at the time of the personal recommendation, it is more suitable than a transfer to the default arrangement of an available qualifying scheme.”
Back to the case in hand …
As mentioned above, we considered the transfer recommendation to be suitable and the workplace pension had been considered in the suitability report … and discounted as below:
“You do have a current workplace pension which would allow you to transfer your Scheme and offer you the flexibility you need. This would also be a cheaper pension product with an ongoing charge of 0.23% per annum. However, you have a very limited knowledge of investments and how they work, and you feel that you will need ongoing advice..
This is not possible via The People’s Pension and there is also a limited choice of 8 investment funds, it for these reasons that this option has been discounted.”
We took the view that this might not be sufficiently robust. There is reference to the small number of funds being a reason to discount the workplace pension. Yet COBS19.1.6 (11) states:
“The presence of one or more of the following circumstances should not be taken as sufficient to demonstrate that the personal recommendation in (7) is suitable:
(a) one of the retail client’s objectives is to have access to a wider range of investment options than available under the default arrangement of the qualifying scheme; …”
The small number of funds available did not necessarily create an unacceptable or unsuitable solution, especially when paired with the funds in the existing SIPP.
In addition, the client’s situation did not obviously appear to be one that would change much or regularly over the years so the need for ongoing advice and ongoing charges was arguable.
Not explicit in the report wording but also a consideration in the adviser’s mind was that the workplace pension would not be able to facilitate adviser charging. This aspect made us recall the view that the FCA published in a major guidance paper back in 2012 (FG12/16):
“We do not consider the ability to facilitate adviser charging to be adequate justification for switching to a new, higher cost solution.”
Although this was in the context of pension switching rather than pension transfer, it is not unreasonable to presume there could be a degree of read over to any kind of advice, including pension transfers.
In any case, providers do not pay adviser charges, they merely facilitate charges from the client’s plan under the client’s authority. It is essentially the same as the client deciding to withdraw sufficient funds from the investment to pay the adviser so surely the client could also make a withdrawal from the workplace pension and pay the adviser from withdrawn funds?
Yes! Of course he could. But there are limitations.
First, the client would have to be of an age (currently 55) to be legally permitted to draw any funds, regardless of whether they are from non-taxable PCLS or taxable withdrawals. This limitation does not apply where the pension provider enables facilitated adviser charging.
Second, where the age limitation does not exist, any funds the client withdraws from the workplace pension as part PCLS simply in order to pay the adviser charge (whether initial or ongoing) would reduce the remaining PCLS available to him or her subsequently. And if the required sum is withdrawn from funds beyond the PCLS, perhaps because the client has already withdrawn the full PCLS, then it would be subject to income tax. Again, neither of these limitations would apply in the case of a facilitated adviser charge.
None of these considerations automatically play against the use of the workplace pension as the destination for transfer but they do have a bearing and should be considered appropriately. For example, where the default fund charges are only marginally lower than the charges that would apply to the proposed personal arrangement the tax situation could have the effect of negating the difference or even tipping the charges aspect in favour of the proposed arrangement.
The moral of this tale is that ALL factors need to be weighed before recommending or discounting a course of action.