At the end of January, the Department of Work and Pensions (DWP) published a short, but long-awaited paper Pension benefits with a guarantee and the advice requirement.
In this factsheet, the DWP outlines exactly what constitutes a safeguarded benefit, which includes:
• Guaranteed annuity rates (unless the GAR is held as a separate insurance policy within the pension);
• Minimum income guarantees within a retirement annuity contract;
• Buyout policies that secure a pension income.
To be a safeguarded benefit, there must be a guarantee for the pension to pay a certain level of pension income and, therefore, where guarantees are linked to non-income benefits these will not be considered safeguarded.
These include:
• Growth rates
• Tax-free cash
• Investment returns
The DWP factsheet is primarily directed at pension scheme providers, as it is their responsibility to determine if the pension contains a safeguarded benefit prior to it being transferred, or converted, to access flexible benefits, as it is not always as straightforward as it may initially appear.
It is the responsibility of the pension provider to determine the value of the safeguarded benefit
Quick recap
Just a reminder of the pension transfer definitions and when additional permission is required:
A pension transfer is defined in the FCA Handbook as:
A transaction resulting from the decision of a retail client who is an individual
• to transfer deferred benefits (regardless of when the retail client intends to crystallise such benefits) from:
– an occupational pension scheme;
– individual pension contract providing fixed or guaranteed benefits that replaced similar benefits under a defined benefits pension scheme; or
– (in the cancellation rules (COBS 15)) a stakeholder pension scheme or personal pension scheme.
(Please note – this only applies in cases where an individual scheme member uses their cancellation rights for the pension transfer not to proceed, and those monies are held in the interim within an individual pension plan. This is an extremely rare occurrence and you may disregard this for the purposes of understanding the new definition)
to:
– a stakeholder pension or a personal pension or
– deferred annuity policy, where the eventual benefits depend on investment performance in the period up to the date when those benefits will come into payment; or
– a defined contribution occupational pension scheme
OR
• to require the trustees or manager of a pension scheme to make a transfer payment in respect of any safeguarded benefits with a view to obtaining a right or entitlement to flexible benefits under another pension scheme
Any transaction falling within the above definition requires the firm to hold pension transfer permissions.
Firms can apply to limit their activity to transfers that only contain a safeguarded benefit from within an individual pension plan or an occupational scheme where there are no safeguarded benefits.
In these instances, the transfer does not need to be transacted by or checked by a pension transfer specialist (PTS). This means there is no requirement for the firm to have a PTS (i.e. a person holding an additional qualification such as AF3, G60 or their equivalent).
The above should not be confused with the requirements of an individual pension holder to obtain financial advice should they wish to access flexible benefits. The requirement to obtain advice applies to all pension holders, where the value of the safeguarded benefit is valued at £30,000 or more.
It is the responsibility of the pension provider to determine the value of the safeguarded benefit from within the scheme/plan as it not always as simple as assessing this against the value of the fund.
Aileen Lynch is head of technical at Compliance First
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