The concept of safeguarded pension benefits was introduced as part of the Pension Schemes Act 2015. The definition of safeguarded benefits as per the FCA website is ‘benefits other than money purchase benefits and cash balance benefits’.
In its simplest terms, this means that anything that involves a guaranteed benefit from a pension forms the definition of safeguarded benefits. This includes defined benefit pensions, guaranteed annuity rates and guaranteed minimum pensions.
As we will explore shortly, there are requirements in place for good reason that mean the majority of clients with these types of benefits will be required to take financial advice before transferring or cashing in pensions with these benefits attached.
Currently, anyone with safeguarded benefits in excess of £30,000 will be required to take financial advice before they can transfer or cash in their pension if it has safeguarded benefits attached.
This is a positive move from the FCA, as in the majority of cases, clients are much better off retaining these benefits rather than transferring and losing them – although not always. By having that requirement to get financial advice, there is a good filter in the form of a financial planner to sense-check your reasons for wanting to take a certain course of action and then offer their professional advice tailored to the clients’ needs and objectives.
Fundamentally, the reason for this can be broken down as follows: the end client needs to fully understand the value of the benefit they are giving up before making a decision.
The client must be able to demonstrate to the administrator of the pension scheme that they have received financial advice within 3 months of the scheme providing the valuation.
Who can advise on safeguarded benefits?
Standard FCA permissions no longer cover this. Adviser firms now need to have extended permissions to cover ‘advising on pension transfers and pension opt outs’ to advise on the transfer and conversion of safeguarded benefits to flexible benefits.
Advice on pension transfers generally must be provided by, or checked by, a Pension Transfer Specialist. If they are only checking the transfer, they must check the entire process, not just the numerical analysis.
For Defined Benefit pension transfers, the transfer value analysis requirement has been replaced with a requirement to undertake ‘Appropriate Pension Transfer Analysis’ of the client’s options. This includes a prescribed comparator (Transfer Value Comparator), which aims to show the cost of providing the same benefits as the DB scheme but in a DC scheme.
Conclusion
The requirement to obtain financial advice before transferring or cashing in these benefits shows how valuable they are, and whilst some DIY investors may prefer to go it alone, this requirement shows the level of analysis that is required to be able to make an informed decision.
