The dilemma of safeguarded benefits

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A thorny problem currently facing many advisers is advising on the transfer of safeguarded benefits. Advice is often mandatory for people who want to transfer, but in many cases such a transfer goes against the adviser’s professional judgement. Robin Nimmo, Strategic Insight Manager from Royal London, gets to grips with the issue.

The Pension Schemes Act 2015 introduced the concept of safeguarded benefits from 6 April 2015. At the same time, it placed a requirement on some individuals to take financial advice before they can give up safeguarded benefits. But what does this all really mean?

What are safeguarded benefits?

Safeguarded benefits are defined as benefits that are not money purchase or cash balance benefits. In other words, they include defined benefits and guaranteed pensions including Guaranteed Minimum Pensions (GMPs) and Guaranteed Annuity Rates (GARs). Some people may be surprised by the presence of GARs in the list, but they are included because the benefits are calculated by reference to the guarantee and not just the plan value.

When must an individual take advice to give up safeguarded benefits?

An individual with safeguarded benefits worth more than £30,000 under the scheme must take financial advice before they can do any of the following:

• Convert these benefits into a different form of flexible benefits under the scheme
• Transfer these benefits to another scheme to take flexible benefits
• Take a cash lump sum in respect of these benefits.

An individual doesn't need to take financial advice where their benefits under the scheme are valued at £30,000 or less. They also don't need to take advice where the scheme administrator has agreed to a conversion or transfer of their safeguarded benefits before 6 April 2015 (the transitional provisions). Not all schemes or plans will offer all of the above options.

How does the process work for transferring safeguarded benefits?

The chart shows the procedure an individual must follow in order to obtain a transfer of benefits.

What form does the confirmation of receipt of financial advice take?

The individual must confirm to the scheme administrator that they have received financial advice before the transaction can proceed. This confirmation must be provided within three months of the individual receiving the safeguarded benefit value from the scheme administrator.

The confirmation must take the form of a written statement from the adviser confirming all of the following:

• They have provided financial advice to the individual on the proposed transaction
• They have the appropriate permissions to carry out the transaction
• The adviser's FCA registration number to carry out the transaction
• The individual's name and the name of the scheme in which they have the safeguarded benefits.

The adviser does not necessarily have to agree with the proposed transaction to provide this confirmation. They are simply confirming that they have provided advice on the proposed transaction to the individual.

What permissions does an adviser need to have?

Advising on the transfer, conversion or cashing-in of safeguarded benefits became a regulated activity from 6 April 2015. Advisers with the ‘pension transfer and pension opt out’ permission are to be treated as having their permission varied to include advising on conversion or transfer of safeguarded benefits from that date.

The Financial Authority (FCA) has recently been consulting on changes to its rules to allow for safeguarded benefits. Based on the proposals contained in the paper:

• Advisers will need to have the new extended 'pension transfer, pension conversion and pension opt out' permission to provide advice on safeguarded benefits
• Advisers will need to have the pension transfer specialist qualification when advising on safeguarded benefits unless it involves GARs.

We currently wait to see whether the FCA make these rule changes in the summer.