Book your place at the CISI Financial Planning Conference 2017

It has been two years since retirees aged 55 or over have been able to spend their pension savings with impunity. Following the unexpected announcement that – subject to certain tax regulations and their pension product supporting the new flexibilities – members of defined contribution (DC) plans are free to take control of their retirement pots, hundreds of thousands of people have taken advantage.  

Research from consultant Xafinity shows the number of defined benefit (DB) to DC transfers increased by 166% in the first three months of 2017, compared to the same period in 2016. New figures from insurance company Royal London, released in June 2017, show that the most common transfer value is between £250,000 to £500,000 – outstripping the average UK house price of £216,000. 
Outdated adviceThe government insists that anyone transferring from DB to DC plans seeks independent financial advice. The current FCA rules state: “When advising a retail client ... whether to transfer ... a firm should start by assuming that a transfer, conversion or opt-out will not be suitable.” The FCA goes on to say that advisers can only recommend a transfer if there is clear evidence that taking this route is “in the client’s best interests”.

This seems sensible. Giving up the security of a DB plan – an irreversible decision – should not be taken lightly. DB schemes offer a promised income for life and part of the pension usually continues to be paid to a spouse on death. The member carries no investment risk and the benefits are based on final salary. By contrast, a defined contribution pension or a cash lump sum has no equivalent guarantees. 
Taking this into account, there are four main reasons why advising a client on making the switch is difficult.   
"In my conference session I’ll discuss what’s driving this demand and explore strategies advisers can adopt to support it more efficiently, more safely and with confidence"1. You have to identify the right clients quickly Bob Gordon, pensions consultancy manager at Standard Life, who will be speaking about the ‘DB or DC?’ advice dilemma at this year’s CISI Financial Planning Annual Conference, says: “Most people, most of the time, will be best sticking with DB. It can give peace of mind that the bills will be paid in old age. 

“But for a significant minority of (predominantly wealthier) DB members, where paying the bills isn’t an issue and their focus is on tax management and legacy planning, flipping over into the new world of DC flexibility can give a better financial outcome for them and their loved ones than sticking with a large, but inflexible, DB pension. Advisers can’t ignore this.

“With demand for DB transfer advice overwhelming capacity, a key challenge for advisers is how to identify the right clients quickly. Time spent advising on DB transfers that have little prospect of going ahead is time that could be better spent. And no one wants to pay a fee to be told to do nothing. This is where an effective pre-advice triage process can pay real dividends.”

Bob adds: “Advisers may be wary of the current regulatory scrutiny, but doing nothing isn’t an option. There’s a duty of care to existing clients with DB and huge demand from potential new wealth clients. In my conference session I’ll discuss what’s driving this demand and explore strategies advisers can adopt to support it more efficiently, more safely and with confidence.”
2. The reasons for swapping have changed Steven Cameron, pensions director at insurer Aegon, agrees that, today, the flexibility afforded by the government’s pension freedoms is one of the main reasons for transferring out of DB schemes, whereas before the new rules the main driver was attractive annuity rates. “When annuity rates were particularly generous, people used to transfer out of DB schemes in the hope of securing a higher retirement income through an annuity,” he explains. 
3. Judgments are based on values not critical yield calculations Increasingly, inheritance tax (IHT) planning is also a key reason to transfer. People are understandably keen to avoid a 40% tax bill, and since pensions do not qualify as part of an estate, they are a neat way to keep expenses down.

Recommending a transfer as part of IHT planning is relatively straightforward for advisers since it returns to cold hard figures. In other cases, the client’s objectives are more subjective.

But this leaves the adviser to make a value judgment rather than one based on critical yield calculations.
4. There’s a current lack of guidance by the FCA In the absence of updated guidance from the FCA, advisers could find they are left open to compensation claims if the decision to transfer, while appearing right at the time, turns out to be a poor one further down the line. If the Pensions Ombudsman deems the transfer advice unsuitable, the adviser may face a fine and inevitable reputational damage. Failure to carry out the appropriate checks also leaves members vulnerable to scams and fraud.

This has led Steven to call on the FCA to define more clearly what constitutes ‘suitable advice’.  

The FCA demands advisers make a comparison between the benefits likely to be paid under a DB scheme with safeguarded benefits and the benefits afforded by a personal pension scheme, stakeholder scheme or other pension scheme with flexible benefits.

When dealing with insistent clients, there are three key steps advisers must take: provide clear, suitable advice for the individual client; be clear with the client what the risks of the alternative course of action are; and show the client is acting against advice.
Reasons to transferHowever, the FCA’s current position does not reflect the myriad reasons why individuals may look at this option today. Its proposed changes include replacing the current transfer value analysis requirement with a comparison showing the value of the benefits being given up; introducing a rule to require all advice in this area to be provided as a personal recommendation, which fully reflects the client’s circumstances and provides a recommended course of action; and updating the guidance on assessing suitability when giving a personal recommendation.
New examUltimately, advisers need to feel equipped to deal with the changing mood towards transfers and they need confidence in dealing with insistent clients. 

In response to a new educational need, the CISI will offer a level 6 Pension Transfers and Planning Advice (PTPA) exam that will cover the FCA specialist exam standards for pension transfer advice, in combination with other exams, pending FCA recognition. The first sitting will be in December 2017.

This is a preview of our article on DC and DB pension schemes on pages 21–25 of the Q3 2017 print edition of The Review. The print edition is available to all members who opt in to receive it, except student members. All eligible members who would like to receive future editions in the post should log in to MyCISI, click on My Account/Communications and set their preference to Yes.