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Can advisers afford to ignore pension transfers?

With over 5 million deferred members of DB schemes in the UK, the simple answer to that question is ‘No’, suggests Andrew Pennie, head of Pathways, Intelligent Pensions

The new pension freedoms give people more choice and control over their pension savings. Many of the new freedoms are only available in the DC (defined contribution) world. So, not surprisingly, their availability has attracted a large and growing number of DB (defined benefit) pension holders to explore transfers from DB to this new and exciting DC world.

With more than 5 million deferred members of DB schemes in the UK, as an adviser you simply cannot afford to ignore this growing area of financial advice.

Many might argue that a DB transfer is giving people the freedom to make a bad decision and for many, that may well be the case. Fortunately, the Government has required that specialist advice be taken before a transfer can complete and provided robust procedures are followed, should prevent too many people making poorly informed and incorrect choices. We understand that the regulator has been looking at firms who offer a ‘cheap’ service to see whether they are doing the job properly.

Fact Find capture

The new DC pension freedoms mean that it’s no longer a straight cash equivalent transfer value (CETV) and critical yield analysis that drives a yes or no decision on whether to transfer. A range of soft factors also need to be considered to identify possible overriding reasons why a transfer may be beneficial and therefore recommended.

The Treasury identified 4 types of client: someone heavily in debt, someone with short life expectancy, someone unmarried with no dependants or perhaps someone who prefers wealth to an income stream.

As part of our fact-find process we will also capture the client’s views on the DB employer, death benefits, fixed versus variable income, taking lump sum benefits at retirement, timing of taking benefits and overall security of pension income. All these factors help us to build a picture of the client’s circumstances, attitudes, priorities and objectives, all of which combine to help us reach the correct decision on whether to transfer.

We have seen a huge increase in DB transfer enquiries and it’s vital that advisers have a process to tackle them, whether in-house or outsourced, as failure to identify and address the need could both disadvantage your clients and be a breach of TCF.

Who can advise on what?

Let’s explore firstly what requires specialist advice and what doesn’t. Essentially, anything that provides ‘safeguarded benefits’ requires specialist advice and permissions. Safeguarded benefits are defined in legislation and basically mean anything with a guaranteed pension or conversion within a DC scheme to flexi access drawdown (FAD) or uncrystallised funds pension lump sum (UFPLS).

This can be further distinguished by looking at what doesn’t count as safeguarded benefits; policies with protected tax-free cash, policies with a guaranteed lump sum, policies with a guaranteed growth rate, payment of tax-free cash in respect of safeguarded benefits and purchase of an annuity from another provider, rather than taking up a guaranteed annuity rate (GAR).

To recommend on transfers of safeguarded benefits you need to be a Pension Transfer Specialist (PTS) and work for a firm which has the required permissions. To become a PTS you will need to be signed off as competent and hold the ‘usual’ qualifications (G60, AF3 etc.).

One area of pension transfers that doesn’t require PTS approval is advice on GARs, however, it does still require the firm to have the correct permissions.

In-house or outsource?

Clearly, where an adviser/firm doesn’t have the PTS qualifications or permissions it will be necessary to outsource to another specialist firm for that advice. Advisers cannot afford to simply ignore pension transfer requests or opportunities just because it’s an area in which they can’t advise – this would be a regulatory breach.

We are also seeing a growing number of PTS qualified advisers looking to outsource DB transfer work. This can be down to a host of factors including higher PI costs, general business de-risking or simply the fact they aren’t doing enough transfers to maintain their experience and prefer to outsource to someone who already has wheels in motion than to keep reinventing their own wheels!

The good news is that there are a number of firms, including ourselves, who specialise in doing DB transfer work and offer a range of solutions to meet the different needs of adviser firms and their clients.

Insistent clients?

There has been much discussion of ‘insistent clients’, with Rory Percival at the FCA saying that he does not see a problem but some networks and trade bodies are more concerned. We are with Rory – except that we do not leave our clients to insist.

If we recommend a transfer but the client decides not to, we seldom find out why. However, if we haven’t recommended a transfer and the client still wants to implement a transfer, we need to find out why.

Have we misunderstood the client’s objectives, or have they misunderstood our advice? With the best will in the world, we cannot know our clients better than they know themselves so we are always prepared to enter into further discussions to resolve any potential misunderstanding and ensure the correct recommendation is delivered.

Where a client is unable to demonstrate to us that a transfer is in their best interests, we will not facilitate the transfer on their behalf. However, if a client knows why he wants to do something and that if he transfers he also understands the risks are his, we are happy to transact the transfer for him.

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