Five things your clients need to know about Defined Benefit pension transfers

By Helen Fisher on September 27, 2018

Essential facts for your clients.

One of the challenges that you always face as a professional looking for new leads is knowing how to target a certain market. One of the biggest growth areas in recent years has been that of pension planning, and this is now one of the main reasons for people asking how to find a financial adviser.

The changes to transfers from Defined Benefit (DB) pension schemes mean that more people than ever are looking to take greater control over their long-term future money planning. As a result, there are some great opportunities for anyone looking for new clients.

A pension transfer from a DB pension scheme involves some major decisions, so here are five things that your clients need to know in order for you to achieve the best outcomes.

1. It’s a big deal

Back in February, consultants Hymans Robertson predicted that some 40,000 savers will be accessing their pension benefits annually following the introduction of the pension freedoms three years ago. This means around one million individuals transferring out of their DB schemes over the next 25 years.

The volume of DB transfers has already surprised some, but with interest rates maintaining their historically low levels, it shouldn’t really be remarkable that they are choosing to take advantage of high transfer values. More than £14bn has already been unlocked from DB pensions since pension freedoms came into effect, according to HM Revenue & Customs data.

Hymans Robertson Partner Jon Hatchett said: “It is already happening. Along this road, we will see the popularity of consolidation solutions such as sole trusteeship, defined benefit master trusts, investment platforms and other mid-game consolidation vehicles take off.”

“We will also see new innovations enter the market, ranging from non-insured risk transfer vehicles to superfunds,” he added.

Making sure that your own leads and existing clients know the scale of the changes and how many other people in similar situations are making the decision to transfer out of DB schemes can only help them come to terms with their own situation.

2. Insulation against market changes

While many people who are likely to take advantage of DB transfers might be interested in doing so because of the low returns they are seeing elsewhere, they are also likely to be concerned about the safety and stability of the funds they have built up over the years.

Letting your clients know that their current situation means that they are somewhat insulated against the ups and downs of the stock market is an important consideration when giving help with money issues.

Some people enjoy choosing investments and have both the disposition and the financial capabilities to deal with potential downturns. However, many holders of DB pensions would be unlikely to cope well with a significant fall in their projected retirement income.

The guaranteed world of DB will be part of the appeal for many who have gone down that route, and as a professional whose responsibility to their clients is to provide clear financial advice, it is vital that you make sure that any risks attached to DB transfers are understood.

3. Tax issues

Royal London’s Director of Policy Sir Steve Webb points out that another value found in a DB scheme is the favourable treatment regarding taxation. As part of your duty to take a holistic overview of your client’s individual circumstances, the lifetime allowance (LTA) may have benefits.

“To give an example, suppose you have a DC pot of £1.03m (the current LTA) and sought to buy an index-linked annuity to provide DB-type benefits,” Sir Steve said. “You would be lucky to get a pension at retirement of £30,000 on the open market, and this has accounted for all of your LTA.”

He went on to explain that a £30,000 pension from a DB scheme would only use up £600,000 out of the LTA, meaning that £430,000 could be built up while benefiting from tax relief.

Of course, as with any other taxation allowance, these circumstances can change in the future, but as part of your duties to your better-off clients, you do need to explain the possible ramifications of giving up on the favourable tax treatment of DB rights.

4. Flexibility

Of course, there are many good reasons for recommending a DB transfer. The most popular one often cited is increased flexibility.

Within many DB schemes, there can be a degree of flexibility, and indeed this can often be more than savers and members know. However, one of the main reasons behind the changes to pension pot legislation was that funds can be accessed flexibly and savers are therefore given more choice. This can be especially important if their circumstances or desires mean that they change their thinking about when to retire.

A case where someone is looking at the state pension and a decent DB pension being good enough for them at the current retirement threshold can be a stumbling block if they decide to retire early, for whatever reason.

Transferring a second DB pension might unlock this option by generating a DC pot, which could be run down, for instance, over a five-year period. This could then provide enough for living expenses until the main retirement income becomes available.

5. There’s more to come

The Financial Conduct Authority (FCA) is constantly looking at how to tweak rules on pension transfer advice aimed at improving the quality so that consumers can make informed decisions.

The FCA’s Executive Director of Strategy and Competition Christopher Woolard said: “Defined benefit pensions are valuable so most people will be best advised to keep them. However, where people are considering a transfer, it is vital that they get good advice to enable them to make an informed decision.”

Government financial planning help will never replace the private sector, but the red tape that it can put in place often means that financial advisers face a series of never-ending changes to how they can operate.

This means that you need to keep up with all the FCA movements so that you can pass on the relevant information to your clients.

“We are also looking at whether further changes are needed to improve the quality of advice in this area,” Woolard explained. “Defined benefit pension transfer advice continues to be a key area of focus for the FCA.”

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