Pension Transfer Charges And Advice Fees – An Overview

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There has been much discussion in the media recently about pension transfer charges and advice fees driven largely by the British Steel pension situation. Should an individual wish to transfer out of a final salary pension (and it is in their best interests) there are various pricing models. The most common pricing models are:

Model A

A free initial meeting, calculations, report and recommendation to transfer (or not).

A charge to complete the transfer with the fee taken as a percentage of the pension fund value.

Model B

A charge for the initial meeting, calculations, report and recommendation to transfer (or not) paid when the meeting takes place.

A charge to complete the transfer with the fee taken as a percentage of the pension fund value.

Model C

A charge for the initial meeting, calculations, report and recommendation to transfer (or not) paid when the meeting takes place.

A set fee (not a percentage of the fund) to complete the transfer with the fee taken at the point the transfer completes.

Pension transfer charging model A appears to be the most common, followed by B and finally C. The charge for the initial meeting in model B typically ranges between £750 and £2,500. In Model A and B, the charge to complete the pension transfer tends to be tiered depending on the fund value ranging from one to five percent.

The percentage charged to complete the transfer tends to be higher in model A than in model B. It is important to note in model B the initial fee applies regardless of a recommendation to transfer (or not).

Contingent Charging

Much of the debate (or is it hysteria!) has focussed on ‘contingent’ charging. In model A the advice and implementation charge is contingent (occurring only if) on the transfer taking place. Contingent charging is allowed under Financial Conduct Authority (FCA) rules.

Some take the view the initial free meeting in model A cannot be impartial as the adviser only gets paid if the transfer takes place and therefore has an incentive to recommend a transfer. An obvious conclusion to reach perhaps but does it really stand up to scrutiny?

Advisers work in a regulated environment. If they give poor advice a claim could be made against the adviser firm at some point in the future. Any claim (be it upheld or not) made is a drain on resources for the firm under investigation as enquiries must be responded to and evidence collected.

A claim also has potential financial implications. Unless an adviser is operating fraudulently or outside the FCA guidelines (there will always be some bad apples in any industry) it is plainly not sensible to risk a claim by advising a consumer to transfer when it is not in the consumers best interests to do so.

In model B an adviser could (if you wish to take a cynical view) collect fees for the review meeting but take an ultra cautious approach and simply advise everyone not to transfer regardless of what the analysis may show. The adviser may believe by advising against a transfer they have protected themselves from any future claim while still securing a significant fee for the advice.

In defence of the contingent fee model (Model A) some will argue it encourages those with a final salary pension to consider all their options. Although a pension transfer is not the right course of action for the majority it is for some. If consumers must pay a significant fee for advice (Model B) it may discourage them from investigating what may be a valid option given their individual circumstances.

In model C the adviser firm will seek to average out costs in some way to charge a standard pension transfer fee. The question may reasonably be asked is it possible to accurately assess what the cost should be and if it is possible is it fair to charge this amount to transfer smaller fund sizes.

Should an individual wish to proceed with a pension transfer after taking the appropriate advice the question then arises why should they pay more for the work (in models A and B) if they have a higher fund value? The answer relates directly to risk (to the adviser) and PI (professional indemnity) insurance costs. The more transfers (value) a financial adviser firm undertakes the higher the PI insurance costs. Those costs are a significant business expense.

Special Financial Conduct Authority permissions are required to perform final salary pension transfer work. To secure the permissions the Adviser must have a higher level of training and experience (which comes at a cost). The FCA also (quite rightly) demands a rigorous reporting, calculation and recommendation process which takes, time, effort and a high level of skills. In any professional services business time and skills cost.

Ultimately, the various pension transfer charging models available in the marketplace provide consumer choice. It is for the consumer to decide which supplier will deliver the best long term outcome and how they wish to pay.

 

This blog is intended to provide a general review of certain topics and its purpose is to inform but NOT to recommend or support any specific investment or course of action. The information in this article does not constitute financial or other professional advice. You should not take action on the basis of this article without seeking regulated independent financial advice that addresses your specific circumstances.