Pensions  

DB transfers: when to go ahead

  • Identify the significance of suitability requirements when assessing for DB transfers
  • Describe when you should and shouldn't make a transfer
  • Identify the importance of capacity for loss in DB transfers
CPD
Approx.30min
DB transfers: when to go ahead

Since the publication by the FCA of Consultation Paper 19/25: Pension transfer advice: contingent charging and other proposed changes there have been a lot of articles, mainly focused on the proposed ban on contingent charging.

The paper states that it is difficult to prove a clear link between contingent charging and unsuitable advice.

But, that contingent charging creates an obvious conflict and incentive to give unsuitable advice.

On top of contingent initial charges, there is the issue of percentage-based ongoing charges and the potential that this could lead to customers paying more per year in ongoing charges than the estimated time/cost required for an annual review.

There were other important considerations, such as a one-page advice summary, risks and comparisons to workplace pensions. Changes to TVCs, cash flow modelling and CPD are also in the mix.

The paper is looking to increase DB transfer suitability rates by removing potential conflicts of interest around charges.

But the FCA’s suitability requirements have not changed, including the starting position that for most consumers a transfer is not in their best interests.

So what are the key drivers for suitability?

The key points of suitability are reiterated in the consultation paper. They are also detailed in the proposals for abridged advice.

Likely suitability can be determined based on:

  • high level health information to ascertain if the client has a materially reduced life expectancy
  • the client's attitude to risk including their capacity for loss
  • the client's attitude to investment risk and their relevant knowledge and experience of investments
  • a high-level understanding of the client's financial and family situation, including other pensions and savings
  • other relevant information such as whether the client is relocating overseas

While low capacity for risk could be used to say a transfer is not suitable, it may not be the end of the story.

Abridged can either lead to a recommendation not to transfer, or be insufficient to draw conclusions, in which case a client may have to proceed to full advice, (or they could decline to take this further).

A client could have a low capacity for risk but may have a very high transfer value.

Now high transfer values in isolation do not make for suitability. But with a Transfer Value Comparator and robust appropriate pension transfer analysis and rigorous stress testing you could conclude that a transfer could be suitable.

As always, the devil is in the detail of the records that are kept.

But at a high level let’s go through a couple of examples showing when a transfer could be suitable and unsuitable.

I will not be detailing how the charges are being paid, and some of the figures may have artistic license.

Bob

Bob’s a widower aged 60 who is looking to retire.

He has two DB schemes, one has just gone into payment giving him £12,000 a year, after taking a Pension Commencement Lump Sum (PCLS) of £80,000.

He has existing Cash Isas worth £50,000, a house worth £400,000 and no mortgage.

He has slight angina, but during fact-finding his adviser discovered that both his parents and grandparents died before 75 of heart problems. His GP is aware and monitoring it, but there are no indications that Bob will follow suit.

CPD
Approx.30min

Please answer the six multiple choice questions below in order to bank your CPD. Multiple attempts are available until all questions are correctly answered.

  1. The FCA's starting position on defined benefit transfers is that for the majority of people they could be useful, true or false?

  2. Which of the following can suitability NOT be based on?

  3. State pension plays no role in assessing a client's suitability for a DB transfer, true or false?

  4. What happens to a DB scheme transfer value if it also allows a pension commencement lump sum?

  5. What impact do successful children have on the decision to transfer?

  6. What does no capacity for loss mean for a transfer?

Nearly There…

You have successfully answered all the questions correctly, well done!

You should now know…

  • Identify the significance of suitability requirements when assessing for DB transfers
  • Describe when you should and shouldn't make a transfer
  • Identify the importance of capacity for loss in DB transfers

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