Do right by the client on DB transfer advice

Susan Hill

Pension freedoms seem to have created a polarisation of attitudes in respect of defined benefit (DB) transfers. On the one extreme, there are naysayers who when biblically quoting the FCA have said transferring out of a DB scheme is an absolute no-go and it is the next mis-selling.

On the other extreme, there are the chancers who see the opportunity in large cash-equivalent transfer values and the regulatory requirement to take advice as a way of extorting short-term exceptional profit margins.

Recent national elections should alert us that polarisation and extremist views are not the popular option, nor, in the case of DB transfer advice, a professional way of conducting business. There is only one way to advise on DB transfers and that is to do the right thing for the client.

The rules are plainly written that when we advise a member of a scheme with safeguarded benefits to transfer out the starting place is to assume that a transfer will not be suitable. The question we need to pose is why do you want to give up these valuable benefits? Pension freedoms have opened the conversation to discuss why giving up a certain income in retirement for an uncertain income set out in a different, but personal model, might be a valid reason why.

Only then should we consider a transfer suitable if we can clearly demonstrate on contemporary evidence, that the transfer is in the client's best interests.

That means we need to compare the benefits likely to be paid under a DB pension scheme with the benefits afforded by a personal pension scheme. Ensure the comparison includes enough information for the client to make an informed decision. In particular, the comparison should take into account all of the relevant circumstances with regard to the benefits and options available under the ceding scheme, and the effect of replacing them with the benefits and options under the proposed scheme. What is difficult about that?

We need to explain the assumptions on which the analysis is based and the rates of return that have to be achieved to replicate the benefits being given up, taking into account the likely expected returns of the assets in which the client's funds will be invested, and document it.

If advisers stopped listening to the naysayers and concentrated on doing the right thing – COBS 19.1 is the starting point – we could have more advisers in this area of expertise and then excessive profit takers might be given the push-off. 

Susan Hill is a chartered financial planner of Susan Hill Financial Planning