DB Pension Transfers – The Value of Doing Nothing
31 July 2017
I’m not known for quoting the great British philosophers, but Pooh Bear once said, “Don’t underestimate the value of doing nothing.”
Without doubt, occupational transfers are risky business and the riskiest occupational transfer of all has to be when a brand-new client tells you they want to transfer their DB scheme.
Just what do they know about DB pension transfers? The answer is probably hardly anything at all!
However, it’s likely that some, or perhaps all the following statements will be true:
• They know someone who has already transferred their DB scheme and told them it’s the right thing to do.
• Their transfer value will feel like a lottery win.
• They’ve never paid a fee for financial advice before.
• They have a low to medium risk tolerance coupled with a low capacity for loss.
• They don’t understand how DB pension schemes work.
• They won’t read or understand any TVAS report you give them.
• They’ll spend their pension long before they die.
• They are far more likely to make a future complaint than any of your regular clients.
Regardless of how many are true, they don’t want to pay for an expensive review, after which you say “no” and you certainly don’t want them on your books as an insistent client.
Whilst we are still in the consultation period for the FCA’s CP1716 – Advising on Pension Transfers, the draft rules give us a clear indication of the new regime for 2018 and beyond.
ATVA, the replacement for the current Transfer Value Analysis, won’t be enough in isolation. In fact, the proposed new rules suggest a knowledge of the client’s relevant circumstances, income needs, intentions for accessing benefits, the relevant wider circumstances of the client, and other relevant factors.
It’s hard to imagine satisfying these requirements without some kind of retirement modelling and indeed they mention this also.
So, before any potential new client sees the pound signs of a pension transfer value, why not model their future retirement but base it on the assumption that they do nothing with their DB scheme?
On the face of it, the client above has a significant shortfall in income because of retiring early and needing money to travel in the early years. However, when you take account of their cash ISA and a Personal Pension, they’ll actually have a pension surplus. So having modelled the client, you can ask them,
“why do you want to give up the guarantees of
the DB scheme by transferring your benefits?”
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