City watchdog acts on pension advice fees to protect savers

PENSION advice fees are to be shaken up by the City watchdog following a string of scandals when customers were persuaded to pump their life savings into high-risk investments.

Firms will no longer be able to offer so-called “contingent” charging models where they are only paid if a customer decides to transfer their money from an existing pot – usually a safe workplace pension with guaranteed payouts – into a new scheme that could expose them to losses.

Regulators at the Financial Conduct Authority have ruled that the controversial fee structure is creating conflicts of interest because it can encourage advisers to dupe savers into taking on dangerously high levels of risk. The fees sparked huge controversy in 2017 when advice sharks targeted workers at British Steel after their employer’s pension scheme was changed. Around 8,000 workers moved their pots into alternative investments – leaving almost 80pc of them worse off.

Since pension freedom reforms were introduced in 2015, hundreds of thousands of people have moved billions of pounds in savings from ultra-secure defined-benefit pensions into pots they look after themselves.

Many are drawn by the chance to draw a 25pc tax-free lump sum, a freedom that only applies to self-managed “defined contribution” pots.

City rules require savers to seek advice before making a transfer. However, the FCA previously found that 69pc of all advice resulted in a recommendation to transfer, although transfers were only thought to be suitable around half the time.

Contingent charging firms can make up to £10,500 by advising a client to transfer, typically charging up to 3pc on a £350,000 pot – the average transfer value.

A firm with flat fees will tend to pocket between £2,500 and £3,500 from advising the same client, but will be paid no matter what they advise.