COBS 19.1.2 states that firms must “compare the benefits likely (on reasonable assumptions) to be paid under a defined benefits pension scheme with… (an)other pension scheme with flexible benefits...” The words “transfer value analysis” do not appear in those rules, but in the current climate it would be a brave compliance manager who ever let such a transfer go through without one.
A 55-year-old client with £12,000 arrears on her £100,000 interest-only mortgage on a £250,000 house was in court earlier this week, as the lender was seeking possession. Her sole remaining asset was a final salary pension, with a cash-equivalent transfer value of £60,000. Her outgoings exceed her income, but she was desperate to hang onto her house. We have agreed to encash her pension – taking tax-free cash and half the residue in 2016/2017, with the balance in 2017/2018 to keep her out of higher-rate tax.
It is worth noting that a mortgage-free state pension will leave her with more disposable income than she has now, and there’s always equity release if things get sticky later. The court agreed and she’s keeping her home.
For the client, this solution is infinitely preferable to any other. I’ve explained it to you in a column. I explained it to the court on three sides. But I must now prepare a TVAS (30 sides), a suitability report (20 sides), plus ‘20-odd pages of key features’, and so on.
Pension freedoms was a game changer. It’s time for the FCA and Fos to recognise this fact.
No
Tony Catt, compliance consultant at TC Compliance Services
DB schemes are more valuable than any other type of pension available. It is unlikely that taking money out of those schemes offers best value to members.
However, our current society tends to go for instant gratification over good long-term decisions. Therefore, the financial services industry is tasked to provide flexibility wherever possible. But providers are rarely able to offer all of the flexibility that the government and regulators have promised to be available. This happened with pension freedoms.
Any moves to build in flexibility to DB schemes would suffer from similar issues of delivery. Partial encashments would be very difficult to administer and would cause the trustees and administrators huge issues.
Due to the fact that many DB schemes are shutting or not allowing new members, there will not be the continuous turnover of membership or volume of contributions the schemes used to receive. Therefore, most schemes are in the throes of decumulation.
To build in flexibility of benefits in DB schemes, at this time of running schemes down, would need to be handled very carefully. Great care needs to be taken to ensure there is sufficient value maintained in the schemes for the members that have not yet reached retirement age. The calculations for flexible benefits could lead to distortion of the value of the benefits for individuals.
Perhaps this is a good time to consider a career change into actuarial roles, as that may be quite a growth area in the future.
