Are defined benefit schemes excluded from pension freedoms?
Steve Webb has been at the centre of controversy again, this time for suggesting that people who want to transfer out of a defined benefit pension should be allowed to, even if they were advised not to:
“Provided there has been genuine independent financial advice and it has been clearly explained to them what the consequences of their choices are, I don’t think personally it’s the job of the receiving scheme to override the preferences of the individual.”
The crucial part of his statement is that people can make their own choice after taking independent financial advice which made them aware of the consequences of transferring out. This then would allow someone, perhaps in exceptional circumstances, to ignore the advice and transfer out.
As things stand, providers deny transfers out of defined benefit schemes if advisers recommend against it, and there are risks that overriding the advice to allow the transfer could lead to disciplinary actions in the future. However, pension freedoms have been a very big part of this government, and Webb seems keen to ensure that everyone has equal opportunity to take advantage of them.
The risk in his statement is that it could be seen to undermine advisers, which could cause its own problems considering the extent of freedoms people will have next year. Retirement is a complicated area and independent advice is needed to help navigate the options and avoid the financial dangers, and undermining that could be considered reckless.
On the other hand, because defined benefit pensions usually offer a good income and transferring out is irreversible, advisers will only recommend leaving in certain circumstances. Members of defined benefit schemes could therefore find themselves trapped in them if the provider refuses to let them transfer away.
It could be argued that only providing the freedoms to some retirees and not others is unfair, which may be why Steve Webb is calling for providers to allow transfers when requested if advice has been taken.
Alan Higham, retirement director at Fidelity Worldwide Investment, thinks a middle-ground could exist, where advisers explain to providers that they have explained the risks to the client but a transfer is still requested:
“If a customer says they fully understand that it might not work out but they want it, and they’re prepared to sign any piece of paper put in front of them to say they’ve understood it, the adviser might then write a letter saying the client wants to proceed with the transfer. They will say they’ve advised the client that it’s not in their best interests but there are reasons they want to go ahead, that they’ve fully understood the risks they are taking and they want to proceed with the transfer.”
Whether transfers out will be allowed if an adviser recommends not to will become clear in the future, but with all the excitement over the ability to remove money from a pension at will it's important to remember that it is a retirement fund to last for years. If an adviser has suggested not taking unnecessary risks with it, people should think very carefully before overruling that advice.
Would you transfer out of a defined benefit scheme to access the new freedoms? Let us know with a comment below.
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