Pensions - Articles - Fresh thinking may square the circle on contingent charging


A potential solution to the issues around ‘contingent charging’ for pension transfer advice has been proposed by Royal London’s Director of Policy, Steve Webb.

 The Work and Pensions Select Committee has this week launched a new inquiry into the issue following its earlier recommendation that contingent charging for advice on pension transfers should be banned outright. The Financial Conduct Authority has so far held back from a ban but is planning to revisit the issue in 2019. The Committee’s latest inquiry raises a number of questions, including specifically asking ‘Are there any alternative solutions that would remove conflicts of interest but avoid any possible negative impacts of an outright ban on contingent charging?’.

 One possible way around this problem could be to allow the cost of financial advice on transfers to be debited from the Defined Benefit pension rights of the client. Advisers would be able to offer advice on a non-contingent or fixed-fee basis, which would remove any potential conflict of interest at that point in the process. Clients would not need to find up-front cash to pay for advice but would receive a slightly lower pension when they retired. This should mean that they were not put off seeking advice in the first place by the need to have significant spare cash. As an example, someone with a transfer value of £200,000 (which is roughly the average figure reported in the Pensions Regulator’s latest figures) who was charged £4,000 for advice would see a 2% reduction in their final pension in retirement. This is unlikely to have a material impact on their standard of living but would enable them to obtain advice on whether a transfer was a good idea. Advice costs can already be deducted from Defined Contribution pensions in certain circumstances but cannot currently be set against Defined Benefit pension rights. Steve Webb is asking the Select Committee to consider the option of changing the rules to give people a legal right to have advice costs set against their DB entitlement. If DB schemes did not want the administrative hassle of debiting DB rights for advice costs it might encourage more schemes to contribute to advice costs which would also produce better outcomes for members.

 Commenting, Steve Webb said: ‘It is understandable that pension scheme members might be put off thinking about a transfer by the need to find several thousand pounds of cash up front to pay for advice. Contingent charging has been one way of helping to reduce the up-front cost, but has raised concerns about a risk of a conflict of interest if the adviser gets paid more when a transfer is recommended. One possible way to square this circle would be to pay for advice out of the client’s Defined Benefit pension rights, though with limits on the amount that can be deducted and on the number of times a deduction could be made. This could remove the need for clients to find cash up front to pay for advice and might enable more advisers to offer a viable fixed-fee option when charging for advice. This could be a win-win and I hope that the Select Committee will include this idea as one of the options for tackling the issues around contingent charging’.

    

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