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Government revises advice requirement for transfers of guaranteed annuity rates


Fewer savers into pensions which promise guaranteed annuity rates (GARs) will be required to obtain independent financial advice before transferring into a scheme without these benefits, the UK government has announced.

It intends to "simplify" the way that these benefits are valued, with the effect that fewer GARs will meet the £30,000 value threshold at which scheme members with "safeguarded" benefits are required to seek financial advice before transferring their savings for the purpose of taking advantage of the new pension flexibilities. Schemes would instead be required to send "personalised" risk warnings to those considering the transfer or surrender of their GAR benefits, along with projections of the annual income the GAR would entitle them to on retirement.

"The government is committed to ensuring that pension scheme members have the freedom to access their pension savings in the way that suits their needs best," it said, in its response to last year's consultation on the issue. "However, in order for members to make informed decisions about their pension savings, it is necessary for them to be fully aware of the potential benefits offered by guarantees that may be attached to these benefits."

The new rules will require changes to the 2015 Pension Schemes Act, which the government intends to implement by the summer, according to the response.

Since April 2015, members of defined contribution (DC) pension schemes have had more freedom to access their savings in any way that they wish once they turn 55, without incurring heavy tax penalties or necessarily having to purchase an annuity from an insurer. Those accessing the new freedoms are entitled to free Pension Wise guidance at the point of retirement, although this service does not provide regulated financial advice.

In order to provide additional protections to those savers with 'safeguarded' benefits, such as benefits backed by guarantee, those with over £30,000 worth of this type of benefit are required to obtain independent financial advice before transferring into a DC arrangement. The method that pension scheme trustees and providers must use to value safeguarded benefits for the purposes of the threshold is set out in legislation and is based on the cash equivalent of salary-related benefits under the scheme. However, as there is no agreed industry approach to valuing the income promise element of GARs, providers have said that this creates "potentially significant practical and financial burdens", according to the consultation.

In response to the feedback, the government will amend the statutory definition of safeguarded benefits to refer to "the actual transfer payment to which the member would have a statutory right in respect of those benefits". This new approach would apply to all types of safeguarded benefits, including those with a GAR element, and would apply to transfers from both personal and occupational pension schemes, according to the consultation response.

The new approach would come with personalised risk warnings for those scheme members with GAR benefits, to reflect the concerns raised by some consultation respondents that members are often "not fully aware" of the potential value of these benefits. Ceding schemes would be required to send these warnings "to members considering transferring or surrendering their GAR benefits", and will also be required to send all members with GARs "projections of the annual income they would potentially be entitled to if they exercised their GAR".

The government has abandoned plans set out in the same consultation which would have required occupational schemes to provide risk warnings before any transfer, as the same requirements do not exist in the FCA rules applicable to personal pension schemes. Similarly, it will not require trustees of trust-based pension schemes to send additional risk warnings to their scheme members beyond those applicable to contract-based schemes.

"The government agrees that extra burdens should not be placed on occupational schemes in the absence of a strong argument for doing so and is therefore no longer requiring schemes to supply risk warnings on transfer," it said in its response.

It would instead "work with The Pensions Regulator ... to see whether the 'Scorpion' information regarding pension scams can include additional information on the possible risks around transfers", it said.

Pensions expert Mark Baker of Pinsent Masons, the law firm behind Out-Law.com, said that although it was "welcome" that risk warnings would not be extended to transfers, the government would "need to monitor this as we build up more experience of pension savers using the new flexibilities".

"The DWP has also announced flexibility on the timing of risk warnings," he said. "This is good news for employers' schemes but also for master trusts, particularly those whose providers run personal pensions and use a common system for both."

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