The ongoing controversy over transfers out of gold-plated final-salary pension schemes is a reminder of the tough balancing act that financial regulators constantly have to manage. For such watchdogs, the line is very fine between protecting consumers and ensuring that excessive red tape doesn't get in the way of their best interests.
The Financial Conduct Authority (FCA), the UK financial-services regulator, announced last week that it will require financial advisers to give much more exacting guidance on transfers out of final-salary or defined-benefit (DB) schemes. On the one hand, this move may protect savers who are misguidedly trading in their guaranteed DB pension benefits, or even being targeted by scams. On the other, the changes will cost the average saver making a transfer more than £1,600, and act as a further deterrent to the pensions industry to offer products and services in this area, even though some people need them.
The FCA is taking action because transfers out of final-salary schemes have reached record levels, with between 80,000 and 100,000 people moving their money out of DB schemes into a personal pension of some sort last year. The numbers are high for a variety of reasons: the introduction of the pensions-freedom regime, nervousness about the financial security of employers sitting behind final-salary plans, and the determination of employers to reduce their pension liabilities, which has seen many offer very generous transfer values to persuade members to give up guaranteed benefits.
Start your trial of MoneyWeek today
Get unparalleled financial insight, analysis and expert opinion you can profit from.
Start your trial
Sign up for MoneyWeek’s free twice-daily newsletter.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
However, while such transfers can sometimes make sense, the FCA's default position is that swapping a guaranteed level of pension benefit for an uncertain outcome is a bad idea for most people. It already requires anyone wanting to transfer a DB pension scheme worth more than £30,000 to take independent financial advice on the suitability of the transaction before they can proceed.
Latest Videos FromMoneyWeek
From next year, however, advisers will be required to give a "personal recommendation" on all transfer cases. The analysis they are required to conduct will also be overhauled, so that it takes into account a broader range of individual financial circumstances, as well as new investment options. The FCA reckons around 5% of transfers several thousand a year are currently taking place without this comprehensive level of independent advice and warns that such cases are often associated with high-risk transactions and scams.
While the crackdown might seem sensible, the FCA estimates that a personal recommendation would add an average of £1,625 to the typical bill from an adviser consulting on a transfer. The controversy is also prompting many in the pensions industry to steer clear of this whole area, for fear of falling foul of a regulatory backlash in the future. Many financial advisers already refuse to give advice on final-salary transfers, while some personal pension providers will not accept monies from such schemes.
The area is certainly a complex one, particularly right now when low interest rates and gilt yields are making it easier for pension schemes to offer the most generous transfer values seen in a generation. When these conditions change, savers offered lower values may find the decision to stay put an easier one to make, though attractions such as the generous inheritance tax treatment of money held in personal pension plans under pensions freedom will persist.
Tax tip of the week
If you use your own vehicle for business purposes, you may be able to claim Mileage Allowance Relief. To work out how much relief you are entitled to, add up your business mileage for the tax year and multiply it by the approved mileage rates (45p per mile for the first 10,000 business miles in the tax year, and 25p thereafter).
If your employer doesn't pay you a mileage allowance, you can claim the full approved amount. If your employer pays you a mileage allowance that is less than the approved amount, you can claim Mileage Allowance Relief on the difference. But keep in mind that if you are fortunate enough to be paid more than the approved amount by your employer, you'll have to pay tax on the difference.
Avoid this tax headache on lump sums
Are you taking a lump sum out of your pension through an income-drawdown scheme? If so, you may need to plan ahead to avoid a tax headache that is catching out thousands of people a year, according to consumer group Which.When you take a lump sum from your pension for the first time, your pension provider is obliged by HM Revenue & Customs (HMRC) to deduct tax from the money through the pay-as-you-earn system.
However, it has to treat this first lump sum as if you are withdrawing monthly income so a £20,000 lump sum, say, would be taxed on the basis that you're taking an annual income of £240,000. The rules have led to many people overpaying tax. While it is possible to claim this back from HMRC around 11,000 refunds a quarter are now being made this is likely to take some time.
So it's clearly better to avoid this problem altogether. One option is to make very small withdrawals from your savings in the first instance as little as £1. Such withdrawals won't result in adverse tax bills and will give HMRC time to supply your pension company with the correct tax code before you take a much larger sum through a second withdrawal. The system isn't absolutely fail-safe, says Which, and pension providers are pushing for HMRC to adopt a new approach. But this should protect most people from excessive tax bills.
