The cost of financial advice on transfers could be debited directly from the defined benefit rights of the clients, as a solution to the contingent charging issue, it has been suggested.
Following the Work and Pensions Committee’s inquiry into the charge, launched on Monday 7 January, in which it plans to explore alternative solutions as well as an outright ban, Royal London director of policy, Steve Webb, said that offering advice on a non-contingent or fixed-fee basis would “remove any potential conflict of interest”.
In October, the Financial Conduct Authority (FCA) confirmed that contingent charging is not the main driver of poor outcomes for customers, despite outlining pros and cons of the charge, while many industry commentators have been quick to warn of the “unintended consequences” of a full ban.
Webb said: “Contingent charging has been one way of helping to reduce the up-front cost, but has raised concerns about a risk of a conflict of interest if the adviser gets paid more when a transfer is recommended.
“One possible way to square this circle would be to pay for advice out of the client’s DB pension rights, though with limits on the amount that can be deducted and on the number of times a deduction could be made.”
The move would mean that members would not need to find thousands in cash up front, in order to access the advice they need.
For example, a member with a £200,000 pot who was charged £4,000 for advice, would a see a 2 per cent reduction in their pension pot, rather than paying the fee upfront. The structure is already used in some defined contribution schemes.
“This could remove the need for clients to find cash up front to pay for advice and might enable more advisers to offer a viable fixed-fee option when charging for advice. This could be a win-win and I hope that the select committee will include this idea as one of the options for tackling the issues around contingent charging,” Webb added.
Furthermore, MP for Eastbourne and Willingdon, Stephen Lloyd, has written to Secretary of State for Work and Pensions Amber Rudd, urging her to fix the broken transfer market, backing calls for a ban on contingent charging.
Lloyd said: “My key focus is in ensuring the customer interest is always protected, and in the pension transfer market this is often not the case. More than half of consumers are, apparently, not receiving the right advice. This is a shocking figure and, frankly, is nothing less than a market failure! Consequently, I have asked the Secretary of State of to investigate.”
The committee is looking for evidence to be submitted into the inquiry by 31 January.