Don't be afraid of the pension transfer

Current market conditions have created a perfect storm for the pensions market and are enticing many in generous but tightly controlled defined benefit (DB) schemes to think about transferring to a defined contribution (DC) scheme.

The pension freedoms which came in last April have led to a relaxation of the rules around how people draw their pensions and given people greater control over how they spend their finances in retirement. 

Equally, interest rates, which had remained unchanged since the financial crisis have recently been slashed further, putting gilt yields under even more pressure with low yields often flowing through to increased transfer values which can make, at face value, a transfer look even more appealing to scheme members.

Any adviser with the best interests of their clients at heart should not be afraid to, at the very least, engage with the world of pension transfers.

With the changes to the tax treatment of pension death benefits from 6 April 2015 which enables members of DC schemes to pass their assets more tax-efficiently to beneficiaries (other than spouses) after death, advisers are understandably seeing an increase in DB scheme members looking to explore the merits of a transfer. 

However, pension transfers remain a complex area, with the potential for pitfalls huge.

The decision on whether to remain in a DB or to transfer to a DC is one of the most crucial many will make in their lives. It is therefore essential that all advisers are aware that this is a situation that could arise.

While some advisers will be able to offer their clients quality advice to ensure they make the most sensible decisions post-retirement, others won’t feel comfortable doing so.

However, where this is the case, advisers should be ready to refer them on to a professional who is able to assist, whether they are inside the firm or outside it. 

This should happen even if the advice is ultimately to remain in the DB scheme. Indeed, it should form part of their duty of care to clients. 

To meet the growing demand from those considering a transfer, the Association of Consulting Actuaries, among others, has seen a rise in the number of advisers taking the AF3 qualification which authorises them to advise on pension transfers.

However, all too often, this is an area advisers shy away from, afraid to venture too far into such a complicated area for fear of getting it wrong. As an industry, we must ensure that all clients who come to us for advice on pension transfers have access to an adviser who is qualified to provide it.

Even where firms do not hold the necessary pension transfer permissions, the FCA has previously stated that “all competent retail investment advisers who give independent advice should be able to identify clients for whom a pension transfer or opt-out should be considered, and be in a position to refer clients to a third party.” 

Clearly, the interest around pension transfers presents a real opportunity for advisers, as they continue to look for ways to increase their revenue stream post-RDR.

But we would exercise caution when it comes to advice: in many cases, the guaranteed income provided by DB schemes means the best option is not to transfer. Indeed, the suitability guidance provided by FCA in COBS 19.1 still advises that firms should start by assuming that a transfer, conversion, or opt-out will not be suitable. 

We’d recommend that every individual case is assessed on its own merits. However, certain factors should be taken into account. These might include considering whether the client has any dependents, if they are in good health, their other pension and non-pension savings, and when they are planning to retire. 

But any adviser with the best interests of their clients at heart should not be afraid to, at the very least, engage with the world of pension transfers, even if ultimately, the advice is to stick to the DB option.

Advisers cannot afford to ignore this important area – good advice can mean the difference between a comfortable retirement and one that is overshadowed by financial worries. 

Linda Todd is head of operations for Bankhall