DB to DC conversions and transfers – what is appropriate independent advice?

The FCA recently issued a policy statement clarifying the meaning of the word 'independent' in the context of appropriate independent advice in relation to transfers from Defined Benefit to Defined Contribution Schemes. We review the FCAs clarification and also provide a reminder about when advice must be obtained.

Since April 2015, the new flexible pension regime has allowed Defined Contribution (DC) pension schemes to offer members aged 55 or over immediate access to their pension savings. Members of Defined Benefit (DB) pension schemes do not have this flexibility unless they transfer their benefits to a defined contribution arrangement. (See legal update “DB to DC Scheme transfers: New requirements” dated 26 March, 2015).

Where a member of a DB pension scheme wants to convert their benefits into flexible form by transferring out, trustees must check they have had “appropriate independent advice” (Advice) before they can make the transfer. This requirement is intended to protect members who could otherwise lose valuable defined benefits.

The requirement to obtain Advice applies when:

  • The transfer would be a statutory transfer.
  • The transfer would be made under the scheme rules.
  • The scheme offers an option to convert accrued defined benefits to flexible benefits.

However, there is no requirement to obtain Advice where the value of the member’s defined benefit rights is £30,000 or less (on a CETV basis).

So what exactly is “appropriate independent advice”?

Appropriate independent advice (Advice) is advice to the member from an independent financial adviser who is authorised by the Financial Conduct Authority (the FCA) to advise on converting defined benefits into flexible form.

The FCA has issued a policy statement which clarifies the meaning of the word “independent” in this context. The statement confirms that, while Advice has to be provided by an adviser who is independent of the employer or the trustees/manager of a scheme, it can be provided by an adviser who operates on either an independent or restricted advice basis.

Trustees must have sight of a written statement from the adviser to the member that covers specific points, including: „

  • the name of the scheme and the member;
  • the adviser’s FCA reference number;
  • confirmation that the adviser has the correct authorisation; and
  • confirmation the adviser has given advice that is specific to the transaction that the member is planning.

Having received this statement from the member, the trustees must check the adviser’s details against the Financial Services Register kept by the FCA.

If trustees fail to check that the member has obtained Advice before proceeding with a transfer, the transaction will remain valid but the trustees will be open to civil fines from the Pensions Regulator. 

Author: Jennifer Crawford

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

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