It’s critical not to use yields on DB transfers

Steven Carlson

In response to the story about misleading transfer value analysis reports on critical yields distorting DB transfer advice, using critical yields is completely irrelevant to people who are considering DB transfers if they have no intention of buying an annuity. However, it adds a whole chunk of information to the advice process that has to be prepared and explained to the client.

This increases costs, and reduces the chance of the client actually understanding the real issues at stake. So I fail to see how on earth it is in the client’s interest to go through with it. Unfortunately, at the moment we have to.

You get the same problem with drawdown cases, when the client wants to access tax-free cash now and defer income until a later date. You then have to go through the explanation of a critical yield Type A, which shows the required rate of return from the fund to match the income available from an annuity today. This is even when the client has already told you that they do not want to take an income now and, when they do, it almost certainly will not be by buying an annuity.

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Combine the two together and you get a complete and utter mess.

What is worse is that there is no requirement at the moment to show the required rate of return needed for these people to maintain the level of income they desire at the age they want to take it, which is surely what we should be doing as financial planners.

The whole system is broken as it is based upon the outdated concept that people are going to retire at their normal retirement age and use their whole pension pot to buy an annuity. This is fast becoming the exception rather than the norm, and it is about time that the FCA updated its procedures/guidance so that consumers only get the numbers that are relevant to them. Advisers could then focus on discussing their situation, and the specific risks/benefits involved without having to overload/confuse them with information that has little or no relevance to them.

Steve Carlson

Chartered financial planner, Carlson Wealth Management