Were you wrongly told to ditch your ‘final salary’ pot?

More than 1,600 financial advice firms have been contacted by City regulators worried that they may have wrongly told savers to cash in valuable “final salary” pension pots.

Debbie Gupta, a director at the Financial Conduct Authority (FCA), told a pension conference last week the watchdog had sent letters to between 1,600 and 1,700 firms as part of its work on transfers out of final salary or “defined benefit” (DB) funds.

The FCA warned this summer that some savers were being wrongly advised, and that transferring out of generous, inflation-linked schemes would not make sense for most people.

A pension set to pay £30,000 a year could be worth as much as £1m.

Ex-chancellor George Osborne’s “pension freedom” reforms of 2015 allowed savers aged 55 and over to access “defined contribution” (DC) savings, leading to a rush of transfers from DB to DC pots. Savers took £34bn out of 200,000 pots last year and the FCA estimates unsuitable transfers have cost consumers £2bn a year.

Final salary schemes, which pay a guaranteed income for life based on a worker’s salary when they retire, were once commonplace but are now largely confined to the public sector. Unlike DC schemes, the employer shoulders the risk that the value of investments may fall. Transferring out of DB pensions means the saver take this risk.

The FCA is also set to ban “contingent charging” where an adviser only gets paid if a transfer goes through. Experts fear this model drives advisers to sanction transfers even when they are not suitable.

Telegraph Money understands that the letters are based on potential issues the FCA has identified in firms’ data on transfers. Those advisers must now address the problems.

Transfers of more than £30,000 must be advised. In 2018, the Financial Ombudsman Service (Fos) received 7,490 new complaints about pensions. The most common were about transfers delayed by advisers, with a smaller number advice suitability.

In one complaint upheld by the Fos, a member of a local government pension was cold-called by an introducer who passed her details on to an adviser. The adviser told her to transfer, even though this left her worse off. Although neither the adviser nor the introducer were FCA-regulated, and so were not under the remit of the Fos, the complainant was compensated by a third-party adviser who organised the transfer. Some in the industry fear a lack of willing advisers could mean delays for savers who want to cash in.

James Baxter, of wealth manager Tideway Investment, said there was “still confusion” over what is good advice, and is concerned that the FCA is “negatively biased”.

He added: “The default should be to stay if you have no reason to transfer. DB pensions are very valuable, but so are many of the transfer offers available. To generalise that transfers will be wrong for most is dangerous.”