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Pension advice fees are to be shaken up by the City watchdog following a string of scandals when customers were persuaded to pump their life savings into high-risk investments.
Firms will no longer be able to offer so-called "contingent" charging models were they are only paid if a customer decides to transfer their money from an existing pot – usually a safe workplace pension with guaranteed pay-outs – into a new scheme that could expose them to losses.
Regulators at the Financial Conduct Authority (FCA) have ruled that the controversial fee structure is creating conflicts of interest because it can encourage advisers to dupe savers into taking on dangerously high levels of risk.
The fees sparked huge controversy in 2017 when advice sharks targeted workers at British Steel after their employer’s pension scheme was changed. Around 8,000 workers moved their pots into alternative investments – leaving almost 80pc of them worse off.
Since the so-called pension freedom reforms were introduced in 2015, hundreds of thousands of people have moved billions of pounds in savings from ultra-secure “defined benefit” pensions into pots they look after themselves.
Many are drawn by the chance to draw a 25pc tax-free lump sum, a freedom which only applies to self-managed "defined contribution" pots.
City rules require savers to seek advice before making a transfer. However, the FCA previously found that 69pc of all advice resulted in a recommendation to transfer, although transfers were only thought to be suitable around half the time.
Today almost a fifth of advice given remains unsuitable, which the regulator said is unacceptably high. It also revealed that 745 transfer firms – almost a quarter of those operating in the market – had given up their permission to offer advice following discussions with the watchdog.
Christopher Woodland of the FCA said the contingent charging model creates a clear incentive for some firms to give bad advice.
He said: "The proportion of customers who have been advised to transfer out of their defined benefit pension is unacceptably high.
"While much of the advice we see is suitable, we are still finding too many cases in which transfers were not in the customer’s best interests."
Defined benefit schemes, which are looked after by employers and pay out guaranteed incomes for life, are now all but extinct in the private sector.
More conventional defined contribution schemes are managed by the individual and the size of the pot depends on performance of the stock market.
Contingent charging firms can make up to £10,500 by advising a client to transfer, typically charging up to 3pc on a £350,000 pot – the average transfer value.
A firm with flat fees will tend to pocket between £2,500 and £3,500 from advising the same client, but will be paid no matter what they advise.
The change was welcomed by Nathan Long of savings company Hargreaves Lansdown.
He said: “From our own models only one in 20 transfers out of a defined benefit scheme is a good idea for the client."
Mr Long added that there are rare instances where contingent charging made sense, for example if it allows poorer workers to access advice without the fear of having to pay even if they do not use a firm’s services.
The FCA has said there will be an exception to the rule for firms are advising people with health conditions who are likely to die earlier – in which case transferring is likely to make more sense – and for poorer clients who may otherwise be put off from getting advice at all.
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