A transfer value analysis system (TVAS) report will need to be run in order to project forward – using a number of assumptions – the potential fund the client could have in future should they transfer out. This will form the cornerstone of the suitability advice but will also need to be interpreted with the client’s unique circumstances in mind. We strongly encourage advisers to use an independent TVAS, with appropriately qualified staff, to clearly demonstrate impartiality.
So what points should be considered when reviewing the suitability of a client’s existing DB scheme? This can be broadly broken down into the following categories:
Flexibility and choice
This is the area which a client is most likely to raise, especially following the 2014 Budget announcements.While a DB scheme will offer the simplicity of a known and increasing annual income, with the choice of a reduced income and a pension commencement lump sum (PCLS) at the outset, this increasingly does not fit with how individuals plan their retirement, for example; those planning a gradual winding-down over a period of several years, with part-time work and consulting still providing some earned income. Taking all of their DB pension income in one go could be unfavourable for the income tax position of these individuals while they have this earned income. Similarly, they may not have an immediate need for a one-off PCLS, which will only add to the value of their estate for IHT purposes and potentially create further tax liability depending on how and when it may be used. Phased drawdown can therefore be extremely attractive for this sort of individual.
If the client is in poor health, but still ultimately likes the idea of the security of a guaranteed income, then a transfer to a DC arrangement, with a view to purchasing an enhanced or impaired life annuity, can be advantageous, as a DB scheme takes no account of someone’s health when paying benefits.
Another factor can be if the member is single, widowed or divorced, and would therefore have no one to take advantage of the spouse’s pension attached to the DB scheme. The scheme will price this into the members’ benefits, whereas a single life annuity will not.
Control of underlying assets
A DB pension is run by the trustees for the benefit of all members, both active and deferred, and the underlying scheme assets are invested and managed to reflect this.
