Personal Finance

NATIONAL NEWSPAPER PERSONAL FINANCE SECTION OF THE YEAR

HUNDREDS of thousands of savers face not being able to access their pension pots because of a dearth in affordable, quality advice. Six years ago, pension freedoms were introduced to great fanfare, offering savers the opportunity to do with their retirement savings as they choose. But today, pension experts warn that far from finding freedom, savers with defined benefit pensions could be left trapped in a plan that does not suit them, l eaving them without the financial flexibility they crave in older age.

Defined benefit pension plans were once offered by most employers and provide scheme members a guaranteed income at retirement – calculated on a mix of years worked and final salary.

By way of contrast, a pension from a defined contribution plan, now the mainstay works pension for many, is dependent upon the amount contributed and the plan’s investment success.

Savers with defined benefit pensions are now required to get financial advice before they are able to enjoy pension freedoms. However, a well-intended crackdown on advisers in the wake of the British Steel scandal, in which many employees were advised to transfer their pensions against their best interests, means that even the number of good quality advisers is dwindling.

Steve Lowe, a director at retirement specialist Just Group, warns that access to high street advisers who offer quality pension transfer advice are ‘on a glide path to oblivion’.

He adds: ‘This is a threat to pension freedoms – it cannot be maintained as a policy unless something changes. It’s getting increasingly challenging for people who legitimately want to consider converting their defined benefit pension into a more flexible pension.’

WHY IS THE SYSTEM GOING WRONG?

DEFINED benefit pensions are among the most generous of pension scheme arrangements and most savers would be wise to hold on to them.

But there are some circumstances in which shifting from a defined benefit pension that provides an income into a scheme that offers access to your full nest egg can make good financial sense.

Savers in poor health, those looking for greater financial flexibility, or those wishing to pass on their pension to their loved ones, are among those for whom a transfer may make sense, although not always.

In some cases, defined benefit pension schemes offer members life changing sums – called transfer values – worth hundreds of thousands of pounds to get them off their books.

Savers are forbidden from accessing a defined benefit pension worth £30,000 or above without first getting financial advice.

This is to stop anyone from giving up a valuable pension without fully understanding what it is worth and before checking that it is the right move for them. However, the number of advisers who offer this type of advice is dwindling, leaving savers with fewer options. The number of specialists operating in this key financial area has halved to around 1,500 since late 2018.

Worryingly, one in three of those remaining are unsure that they will be providing advice in a year’s time, according to recent research from financial consultants Lane Clark & Peacock (LCP) and insurer Aviva.

WHY IS GOOD ADVICE SO HARD TO COME BY?

FINANCIAL advisers are leaving the pension transfer market in droves. Aviva and LCP questioned more than 200 advisers who offer – or recently stopped offering – pension transfer advice.

The most common problem cited was the soaring cost of professional indemnity insurance, which covers advisers if any client later claims they were given poor advice and seeks compensation. The cost of this insurance has gone through the roof in recent years.

Alistair McQueen, head of savings and retirement at Aviva, warns that small adviser firms in particular have been hit by the rising costs.

He says: ‘There are some firms that have been advising in this market for years and have never had a complaint or a sanction. Yet, because insurance costs have gone up by several multiples, they have been forced to leave. It’s not a good outcome, because consumers no longer have access to that good adviser.’

Other reasons why advisers have been driven out include the perceived hostility of the regulator towards transfers and the ban on contingent charging, which means that members now have to pay for advice whether or not they go ahead with a transfer. This has acted as a deterrent.

WHAT DOES THIS ALL MEAN FOR SAVERS?

SAVERS face rising costs and fewer options. Those who chose to transfer out in the past year faced record fees after transferring, new figures from pension administrator XPS found.

Upfront costs for transferring can be anything up to £20,000 for the largest