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Fresh thinking on paying for transfer advice could be solution to contingent charging

10 January 2019

Royal London’s Steve Webb has put forward a solution to the issues around ‘contingent charging’ for pension transfer advice, as the Work and Pensions Select Committee launches a new inquiry into the issue. 

In response to the Committee’s question as to whether there are alternative solutions that would remove conflicts of interest but avoid any possible negative impacts of an outright ban on contingent charging, Webb says one answer could be to allow the cost of financial advice on transfers to be debited from the Defined Benefit pension rights of the client.

According to Webb, advisers would be able to offer advice on a non-contingent or fixed-fee basis which would remove any potential conflict of interest. In what Webb has described as a possible “win-win”, clients would not need to pay upfront for advice, but would receive a slightly lower pension when they retire.

For a client with a pension pot of £200,000 who was charged £4,000 for advice, this solution would see a 2% reduction in their final pension in retirement. Webb said this method would be unlikely to have a “material impact on their standard of living”, but would enable them to obtain advice on whether a transfer was a good idea.

Such a system currently operates for defined contribution pensions in certain circumstances, but Webb is calling for a change in the rules for defined benefit pension rights to allow people to have advice costs set against their DB entitlement.

He said: “It is understandable that pension scheme members might be put off thinking about a transfer by the need to find several thousand pounds of cash up front to pay for advice. Contingent charging has been one way of helping to reduce the up-front cost, but has raised concerns about a risk of conflict of interest if the adviser gets paid more when a transfer is recommended.

“One possible way to square this circle would be to pay for advice out of the clients’ defined benefit pension rights, though with limits on the amount that can be deducted and on the number of times a deduction could be made.”