As well as looking at the peripherals, the fundamental point has been the giving up of a guaranteed income, and for many this is the ‘be all and end all’ of the issue, as well as the central point of the advice process.
I can argue that there are other lifestyle issues that can have a big effect on the decision, however, that ‘guarantee’ can be priceless and, some would argue, not so easily achievable. The underlying principle in giving up a guaranteed income is the transfer of investment risk – it is a key advice point that the investment risk of replicating the ‘guarantee’ is now passed to the individual. I would guess that for many people this should be the end of the process.
Obviously the transfer value analysis rules (TVAS) look at the critical yield needed for the transfer value when invested in order to be able to purchase an annuity of the same amount at the pension age of the transferring scheme. Side point: this is one of the areas that needs reviewing, as pension freedoms could well involve income drawdown at a date different to the retirement date of the transferring scheme.
In their update in January 2017 the FCA made the point that there was an important link between the critical yield and the investment profile/investments made. This makes perfect sense; consider a critical yield of say, 6% for someone with no appetite for risk. This should be a major factor in the advice given.
So in many ways this leads us to an advice process that has a number of similar principles to that concerning the retirement decision.
The adviser will need to ascertain the following:
• Does the client now ‘foregoing’ the guarantee understand what they are doing?
• Do they understand the investment world?
• If yes to the above, does the potential transferor know their attitude to risk, and how robust is that assumption?
• Another big consideration will be the transferor’s capacity for loss if the investment assumptions are not achieved.
There is a strong school of thought that cash flow modelling is a ‘must have’ as part of the retirement process.
This is now being replicated as part of the transfer process. I will admit, this must be a good way of illustrating the advice given but it is also a good way for the client to monitor progress on an annual basis and, if necessary, revise assumptions to take into account changes in circumstances and to the investment returns actually achieved.
Indeed, the whole advice process can sometimes become a bit theoretical and the cash flow modelling process is a good way of providing a focus.
Another key issue to consider in the transfer debate is the percentage of the client’s total wealth represented by the transfer value.
A small transfer value in the context of the overall total should (I would suggest) be easier to justify than a transfer that is pretty much the only source of post retirement wealth. It now seems to be fairly standard practice for advisers to get a schedule of other assets for the client and their spouse in the fact finding stage.
Defined benefit transfers are here to stay but the ‘guarantee’ can and should be a major part of the decision making process.
Mike Morrison
Head of Platform Technical
Indeed, the whole advice process can sometimes become a bit theoretical and the cash flow modelling process is a good way of providing a focus.
Another key issue to consider in the transfer debate is the percentage of the client’s total wealth represented by the transfer value.
A small transfer value in the context of the overall total should (I would suggest) be easier to justify than a transfer that is pretty much the only source of post retirement wealth. It now seems to be fairly standard practice for advisers to get a schedule of other assets for the client and their spouse in the fact finding stage.
Defined benefit transfers are here to stay but the ‘guarantee’ can and should be a major part of the decision making process.
Mike Morrison
Head of Platform Technical