Pension freedoms have made retirement saving decisions confusing enough – but even the government and regulators cannot agree on some points.
The National Association of Pension Funds (NAPF), a trade body for pension providers, has pointed out that the Department of Work and Pensions and the Financial Conduct Authority are offering conflicting definitions on the same point.
The disagreement concerns whether guaranteed annuity rates are benefits in defined benefit pensions, such as those paid into by police and civil servants.
The point is if the rate is considered a benefit, then defined benefit pension holders must obtain financial advice before transferring their fund to a direct contribution pension.
They would want to do this as defined benefit schemes are outside the new pension freedom rules, while direct contribution schemes are not.
Guaranteed annuity rates
However, the FCA has told financial advisers that a guaranteed annuity rate is a protected benefit, so retirement savers with the option should take advice before switching – but the FCA has issued guidelines suggesting that in most cases, advisers will have no good reason for recommending the transfer because of the loss of benefits.
The Department of Work and Pensions takes a slightly different stance, stating the guaranteed annuity is not a benefit until taken by the retirement saver – which means no professional advice is needed on a transfer.
The quandary is if financial advisers recommend a transfer under the government guidance, the FCA can investigate or fine them for rule breaking under their guidelines. The result is advisers are reluctant to deal with defined benefit clients and some retirement savers who want to switch pensions are trapped in red-tape.
NAPF policy adviser Helen Forrest is asking the FCA for clarification on the discrepancy between the two official bodies.
“This difference of opinion is leading to debate in the industry as to what benefits are for a defined benefit pension scheme,” she said. “Some consistency between the two official bodies would be helpful as it is their job to make the rules and communicate them effectively to advisers and pension firms.
“Pension freedoms mean many people with defined benefit funds are looking at making a switch to a direct contribution scheme so they can access their money earlier. However, this doubt injected by the policymakers means no one can make a decision with any certainty.”
Neither the Department of Work and Pensions nor the FCA has yet responded to the query.