COBS 19.1 Pension transfers and opt-outs
Preparing and providing a transfer analysis
1If an individual who is not a pension transfer specialist gives a personal recommendation about a pension transfer or pension opt-out on a firm's behalf, the firm must ensure that the recommendation is checked by a pension transfer specialist.
A firm must:
- (1)
compare the benefits likely (on reasonable assumptions) to be paid under a defined benefits pension scheme with the benefits afforded by a personal pension scheme or stakeholder pension scheme , before it advises a retail client to transfer out of a defined benefits pension scheme;
- (2)
ensure that that comparison includes enough information for the client to be able to make an informed decision;
- (3)
give the client a copy of the comparison, drawing the client's attention to the factors that do and do not support the firm's advice, no later than when the key features document is provided; and
- (4)
take reasonable steps to ensure that the client understands the firm's comparison and its advice.
In particular, the comparison should:
- (1)
take into account all of the retail client's relevant circumstances;
- (2)
have regard to the benefits and options available under the ceding scheme and the effect of replacing them with the benefits and options under the proposed scheme; and
- (3)
explain the assumptions on which it is based and the rates of return that would have to be achieved to replicate the benefits being given up.
When a firm compares the benefits likely to be paid under a defined benefits pension scheme with the benefits afforded by a personal pension scheme or stakeholder pension scheme (COBS 19.1.2R (1)), it must:
- (1)
assume that:
(a) the annuity interest rate is the intermediate rate of return appropriate for a level or fixed rate of increase annuity in (2COBS 13 Annex 2 3.1R(6))2) or the rate for annuities in payment (if less)
(b) the retail prices index is
2.5%
(c) the average earnings index and the rate for section 21 orders is
4.0%
(d) the pre-retirement limited price indexation revaluation is
2.5%
(e) the post-retirement limited price increases at
2.5%
(f) the index linked pensions rate is the intermediate rate of return in 2COBS 13 Annex 2 3.1 R (6)2 for annuities linked to the retail prices index;
or use more cautious assumptions;
- (2)
calculate the interest rate in deferment; and
- (3)
have regard to benefits which commence at difference times.
If a firm arranges a pension transfer or pension opt-out for a retail client as an execution-only transaction, the firm must make, and retain indefinitely, a clear record of the fact that no personal recommendation was given to that client.
Suitability
When advising a retail client who is, or is eligible to be, a member of a defined benefits occupational pension scheme whether to transfer or opt-out, a firm should start by assuming that a transfer or opt-out will not be suitable. A firm should only then consider a transfer or opt-out to be suitable if it can clearly demonstrate, on contemporary evidence, that the transfer or opt-out is in the client's best interests.
When a firm advises a retail client on a pension transfer or pension opt-out, it should consider the client’s attitude to risk in relation to the rate of investment growth that would have to be achieved to replicate the benefits being given up.
When a firm prepares a suitability report it should include:
- (1)
a summary of the advantages and disadvantages of its personal recommendation;
- (2)
an analysis of the financial implications (if the recommendation is to opt-out); and
- (3)
a summary of any other material information.
If a firm proposes to advise a retail client not to proceed with a pension transfer or pension opt-out, it should give that advice in writing.