DB transfer conundrum still proving hard to tackle for IFAs
- Describe some of the challenges of advising on DB transfers
- Explain the impact of high PI costs
- Identify reasons to challenge an insistent client
- Describe some of the challenges of advising on DB transfers
- Explain the impact of high PI costs
- Identify reasons to challenge an insistent client
Following the release of a recent survey by Aegon, it has become increasingly clear that more and more IFAs are rejecting the defined benefit transfer market to concentrate on other, less ‘risky’ areas of financial advice.
This will of course come as no surprise to many, given current market conditions and the wide-ranging changes that have impacted the industry over the past few years. In fact, this is a trend that has been happening for some time.
However, members of DB schemes still deserve the opportunity to review their pension benefits.
After all, although it is true that for most members a DB transfer is unlikely to be suitable, in certain circumstances and for a limited number of clients, it can still be the right option.
Over the past year considerable increases in interest rates/gilt yields has seen average transfer values drop, substantially in some cases. This has led to a dip in demand from clients that would previously have been motivated by potentially generous cash equivalent transfer values.
In the medium to long-term, we are probably going to again see an increase in the demand for DB transfer advice. However, the traditional reasons why a client may wish to transfer, in short ‘flexibility, control and death benefits’, have not changed.
In addition, all other factors being equal, as a scheme member gets closer to retirement age and their benefits increase, their transfer values will likewise increase.
Meanwhile, long-term interest rates/gilt yield falls would also generally push transfer values back up.
With all of this in mind, it is fair to assume that at some point, most likely in the medium to long-term, we are probably going to again see an increase in the demand for DB transfer advice.
| Transfer Watch over the past 12 months | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2023 | |||||||||||
| Jul | Aug | Sep | Oct | Nov | Dec | Jan | Feb | Mar | Apr | May | June | |
| XPS Transfer Value Index (estimated cash transfer value of a pension of £10,000 a year in £000s)* | 210 | 197 | 181 | 175 | 179 | 171 | 175 | 168 | 175 | 169 | 159 | 162 |
| XPS Transfer Activity Index (%)** | 0.41 | 0.38 | 0.38 | 0.48 | 0.87 | 0.44 | 0.39 | 0.42 | 0.38 | 0.34 | 0.55 | 0.25 |
| XPS Scam Flag Index (%) | 94 | 91 | 97 | 96 | 93 | 93 | 93 | 92 | 90 | 94 | 93 | 95 |
*under current market conditions of a 64-year-old member with a pension of £10,000 a year with typical inflation increases. **annualised proportion of members that transfer out of pension schemes administered by XPS. Source: XPS Pension Group | ||||||||||||
DB transfers – a lot of work for an uncertain outcome
The Financial Conduct Authority's ban on contingent charging introduced in January 2021, along with a raft of further rules around the provision of DB transfer advice, has seen a typical DB transfer timescale nearly double in the past three years, from around four months to eight months, from initial enquiry to completion of a transfer.
Many advisers have adopted the ‘gold standard’, which requires the provision of ‘triage’ early in the advice process, while also choosing to offer abridged advice prior to full advice, often at no additional cost.
The net result of all this is mostly positive; clients are likely to be better informed prior to making an irreversible decision, while advisers themselves can be more confident that their clients comprehend the risks.
With the difficulties of applying FCA rules and guidance, it is not surprising that an increasing number of IFA’s will simply not want to service this area of advice.