The Financial Conduct Authority (FCA) position regarding final salary pension transfer advice is set out below:
When advising a retail client who is, or is eligible to be, a member of a defined benefits occupational pension scheme or other scheme with safeguarded benefits whether to transfer, convert or opt-out, a firm should start by assuming that a transfer, conversion or opt-out will not be suitable. A firm should only then consider a transfer, conversion or opt-out to be suitable if it can clearly demonstrate, on contemporary evidence, that the transfer, conversion or opt-out is in the client’s best interests.
Until pensions freedoms were introduced, the conventional wisdom was that unless there were special circumstances, it was normally in the member’s best interests to remain a member of a defined benefit pension scheme rather than transfer to a money purchase pension arrangement.
With the introduction of pension freedoms and the current low rates of interest, inflation and investment returns increasing the size of Cash Equivalent Transfer Values (CETV’s) being offered, it has increased the demand for specialist defined benefit pension transfer advice.
However, with the shadow of the pension mis-selling scandal of the mid/late 1990s still hanging over pension transfers, everyone involved with defined benefit pension transfer advice (especially the regulator) takes it very seriously and will always err on the side of caution.
Transfer Value Analysis (TVA) Reports
If a member has safeguarded benefits of more than £30,000 they must seek advice from a qualified pension transfer specialist if they want to transfer to a money purchase pension arrangement.
The FCA sets out detailed requirements which must be followed and advisers must compare the benefits under the defined benefits scheme with the benefits payable after transfer. The critical yield calculation is an important element of this analysis.
However, many pension experts are now highlighting the limitations of using the critical yield as an assessment tool in the transfer advice process if the objective is not to buy an annuity at retirement.
The main focus of any TVA report should be to present the scheme member with relevant information so they can make an informed decision.
Why is a TVA Report Important?
Apart from being a FCA requirement, for consumers with over 12 months to their scheme normal retirement age, the transfer value analysis (TVA) report provides critical yield information to assist in the decision-making process and provides a degree of “checking” the benefits versus CETV offer.
For consumers within 12 months of their scheme normal retirement age there is no requirement to check the scheme benefits against the CETV offer – why?
Pension administration is prone to data mistakes!
It is an inherent feature of pension schemes with long histories which have undergone multiple changes in administrator and/or IT systems.
We believe it is possible that many consumer pension records could potentially have data errors that would make a significant difference to the CETV offer generated.
With the increased volumes of pension transfer requests, it is possible that pensions administration staff do not have the experience or necessary skills to identify these mistakes.
For consumers within 12 months of minimum retirement age we believe it is in their best interest to have a TVA report – to analyse whether the pension benefits the scheme are offering are correct and to check the CETV offer by valuing the benefits in line with current market annuity rates for comparison.
Back of the envelope calculations such as “CETV/Pension = Pension multiple” do not reflect the Minimum Benefits Test procedures that contracted out schemes need to apply nor does it identify any step pension entitlement requirements that may apply from State Pension Age for contracted out scheme members.
We use the TVA reports produced by the specialist actuaries at Briggs Murray Actuarial Ltd.
After ensuring that the scheme benefits and corresponding CETV are correct the Briggs Murray Actuarial TVA report has an interactive drawdown modeller that allows exploration of the unlimited drawdown/uncrystallised funds pension lump sum (UFPLS) case scenarios and payment patterns available for any size pension transfer.
Points to Consider When Planning Your Future Retirement Objectives
Your Income Requirements
Most people naturally want as much income as they can get but it is important to think about your future income requirements and to take account of inflation. You may also need more income in the future to help pay for increased living expenses or if you need to pay for home help or care.
Remember, the more income you take from your pension pot in the early years the less income will be available later in retirement.
How much certainty and/or flexibility do you need?
The need for certainty doesn’t need explaining, especially if you don’t want to take any risks, but the need for flexibility may not be so obvious.
You might need some flexibility for the following reasons:
- In case your income requirements change over time
- To benefit from any increases in equities or long-term interest rates
- In the event your health deteriorates and you need to pay for additional care
- If you wish to have flexibility in deciding who will be the beneficiaries of your residual pension funds after your death
Your attitude to risk and capacity for loss
When assessing how much risk to take you should consider not only your attitude to risk but also your capacity for loss. Attitude to risk is an easy concept to grasp and is normally expressed as low risk, medium risk or high risk.
Low Risk – You would ideally like to have most of your investments in cash and fixed interest securities in order to protect the value of your capital.
Medium Risk – Someone who would like to take advantage of equity investment with the prospect of good long-term returns but can accept some short-term volatility which may result in a fall in the value of the investment.
High Risk – You will consider exposure to higher risk investments despite the potential loss of capital.
Your attitude to risk is normally measured as your tolerance to taking investment risk and we have special questionnaires and tools to help assess your risk profile.
Capacity for loss is described as your ability to absorb falls in the value of your investments or income without it causing you adverse financial hardship or emotional strain.
What will happen after your death?
The focus for retirement income planning should quite rightly be on your income needs and the needs of those directly dependent on you such as your spouse or partner. However, it is only natural to want to leave an inheritance to your wider family if that is possible and does not adversely affect your own personal income position.
Once you have set out your retirement objectives and attitude to risk we can research which product options will give you the best solution. Our specialists will identify the options which meet your objectives and then recommend the solution that is most suitable to your circumstances.
Final Salary Pension Transfer Advice Cost
The cost for defined benefit transfer advice ranges between 0.5% and 2% of the CETV amount – depending on the CETV size.
There is a minimum fee of £1,500.
If we decide a transfer is not in your best interest – then there is no fee payable.