The Transfer Value, the Fee That Only Pays on Completion, and the Insistent Client
Marcus, 57, is a member of a private-sector defined benefit (DB) scheme with a normal pension age of 65. His deferred pension is £19,500 a year, index-linked to CPI up to 5%, with a 50% spouse's pension. The scheme has offered a cash equivalent transfer value (CETV) of £520,000, guaranteed for three months. Marcus wants to move to a SIPP so he can take flexible income from age 58 and 'leave something to the children'. He has £40,000 of other savings, no mortgage, and says he will transfer 'whatever you advise'. The advising firm, Kestrel Wealth Ltd, is authorised for pension transfer advice and its adviser, Dan, holds the pension transfer specialist qualification. Kestrel charges £1,800 for the report, plus £4,800 payable only if Marcus proceeds and the SIPP is funded. Kestrel's pension transfer income fell 45% last year, and the sales director has asked Dan to 'get the numbers back up before the year end'.
1. Identify and explain the regulatory problems with Kestrel's charging structure, and state what would need to change.
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The core problem is the £4,800 contingent fee. Since 1 October 2020 the FCA has banned contingent charging for advice on DB pension transfers. A fee that becomes payable only if the client transfers, and becomes payable out of the transferred fund, is exactly the arrangement the ban targets: it gives the adviser a financial interest in the transfer proceeding, so the advice cannot be seen as independent of the outcome.
Only narrow exceptions apply, for example where the member has a serious ill-health condition and a life expectancy of under 12 months, or where the scheme is winding up and the member has no realistic alternative. Pressure on Kestrel's income is not an exception.
What must change:
- The advice fee must be payable regardless of the recommendation, and must be set at a level that covers the cost of giving the advice. Cross-subsidy between the advice fee and implementation charges is not permitted.
- The £4,800 can only be a genuine implementation or ongoing servicing charge, separately justified and disclosed, not a reward for transferring.
- The sales director's instruction is itself a conduct risk: a senior manager encouraging advice to be shaped by revenue targets conflicts with the Consumer Duty (acting in good faith and avoiding foreseeable harm) and with the conduct rules on integrity and paying due regard to customers' interests.
- Dan should decline to proceed until the fee structure is corrected, and the matter should be escalated to the compliance oversight senior manager.
2. Marcus says he will transfer even if Dan advises against it. Explain how the firm should handle this, with reference to the rules and the evidence it must keep.
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A client cannot be prevented from transferring, but the firm must not allow its process to become a rubber stamp. The expectation is that a transfer will not be suitable for most members, and the advice must be evidence-based.
Steps Kestrel should take:
- Complete the full advice process first - the transfer value comparator, the appropriate pension transfer analysis, and consideration of the scheme benefits being given up (guaranteed inflation-linked income, spouse's pension, no investment or longevity risk).
- Record clearly why the recommendation is not to transfer, and explain to Marcus, in terms he understands, the specific losses: loss of the guaranteed £19,500, the CPI link, the 50% spouse's pension, and the fact that the SIPP is exposed to investment and longevity risk.
- Obtain a written, signed statement from Marcus confirming he is proceeding contrary to the firm's advice and understands the risks. Record the conversation.
- Consider his vulnerability and capacity to make the decision, and whether the decision is genuinely his rather than driven by a third party.
- Have a senior manager review the file and decide whether the firm is willing to act. Declining to implement an insistent transfer is a legitimate outcome; continuing must be consistent with acting in his best interests.
- If the firm does proceed, document that the SIPP provider has been made aware the transfer is against advice.
3. Beyond the transfer analysis itself, what must Dan's advice cover, and what lower-cost service could Kestrel have offered?
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Content the advice must cover:
- The transfer value comparator, so Marcus can see the capital needed to replicate the DB income.
- The scheme's own options: many schemes now offer partial transfers, flexible or early retirement, or a bridging option from age 58 - these must be considered before any transfer.
- His health and life expectancy, and whether a spouse or dependants would rely on the survivor's pension.
- The loss of any guaranteed annuity rate or other safeguarded features.
- Tax consequences after transfer: the SIPP benefits become subject to the lump sum allowance and lump sum and death benefit allowance, whereas the scheme pension is not; income taken flexibly is taxed at his marginal rate.
- Charges: SIPP platform, fund and advice costs, compared with the scheme's costs.
- His wider position: £40,000 of savings, no long-term care provision, and a stated wish to leave money to children, which may pull in the opposite direction to a transfer.
Lower-cost option: since October 2020, firms must be able to offer abridged advice. This is a simplified, cheaper process that can only produce one of two outcomes - that a transfer is not in the client's best interests, or that the firm cannot be certain either way. It cannot recommend a transfer. Where the conclusion is uncertain, the client can then choose to pay for full advice. For Marcus, abridged advice would very likely end at 'not in your best interests' at a fraction of the cost, and offering it should be documented.