Change, choice and consultation: Financial planner Lee Pringle with a planner’s perspective on advising clients about DB pensions

Lee Pringle, Wealth Planner at Succession Group, gives a planner’s perspective on the challenges of advising clients on defined benefits pension benefits and why a detailed assessment of each individual scenario is essential

It was an interesting year. The Falklands War began, Bobby Robson was appointed England Manager and Mark Thatcher got lost in the middle of the Sahara.

Meanwhile, health workers demanded a 12% pay rise, Laker Airways collapsed adding to the 14% unemployment figures for the UK [source: Bank of England].

It’s 1982; in the same year the DeLorean car factory is put into receivership, the Ford Sierra is launched to buyer controversy for its “ultra-modern aerodynamic styling”.

This is the year when long-dated gilt yields were 14%. It was also the year that The Clash released their only number-one single, “Should I Stay or Should I Go?”.

The defined benefits conundrum

Okay, it’s a tenuous link, possibly already overused in the industry, but one that reflects the “talk of the town” at the moment, which is around defined benefit pension transfers. It’s the basis of important decisions facing many advisers’ and clients right across the UK. Should they stay or should they go? Do they take the transfer value which is on offer and hope for the best, or stick with the defined benefit scheme?

The changes in pension legislation since April 2015 have somewhat divided opinion in the adviser community on the respective advantages and disadvantages of considering a transfer of DB Benefits to a DC arrangement.

The regulator’s stance

The FCA’s current guidance is clear that the starting position should always be that a transfer of defined or safeguarded benefits will not be suitable. A transfer should only be considered suitable with demonstrable, contemporary evidence that the transfer is in the client’s best interests.

However, it is important to recognise that the economic and legislative environment has changed significantly in recent years. Clients now have more options available to them when accessing their pension savings. In addition, recent changes to the financial and political environment, have led to historically high levels of transfer values.

Encouragingly, the FCA in its June 2017 Consultation Paper (CP17/16-Advising on Pension Transfers) stated,

“We are taking this opportunity to re-state the starting assumption when advising on a transfer of safeguarded benefits, and clarifying that the onus is on the adviser to prove that a transfer is in a client’s best interests.”

Notably, it confirms, this is not a softening of its approach.  The paper makes it clear that it is essential for an adviser to demonstrate that an individual will benefit from giving up a valuable pension.

In looking for a more rounded assessment of suitability, the FCA acknowledges that some of the current rules do not explicitly allow for the variety of options available to members under the pension freedoms.

The advice process

After this period of FCA consultation, the FCA will, of course, continue to insist that the focus remains on whether a transaction is right for the client, and that it is assessed on a case by case basis from a neutral starting position. As advisers, while a client’s objectives may be the reason he or she has sought our advice, the client’s needs must also influence the advice process.

We cannot underestimate the importance of using cashflow modelling to build a financial plan as part of the advice – and subsequent review – process, that addresses the client’s needs, goals and aspirations.

Analysis should, therefore, include sufficient information for advisers to understand and explain how prioritising any of the client’s objectives may result in trade-offs.

For example, if the client is prioritising death benefits, then the pension freedom reforms offer the opportunity to pass these substantial funds down the generation in a very tax efficient manner. However, it is also imperative that any adverse impact of this on potential income should be illustrated.

The value of assessing and prioritising a client’s needs and objectives is hugely significant.  This becomes particularly pertinent when you have experienced the impact of your advice at first-hand, as the following case study highlights.

Our case study example

Mike was introduced to us in December 2015. Divorced, with three non-dependent “20-something” daughters, he requested our assistance in assessing the £1.3m cash equivalent transfer value for his non-contributory deferred defined benefits pension plan.

Discussions and planning on his objectives around Lifetime Allowance protection, early retirement plans, levels of pension commencement lump sum and the significant difference in potential death benefits were held.

His subsequent acceptance of our report findings led to submission of all relevant documentation with a transfer of monies completing early March 2016.

Sadly, Mike died of a heart attack 20 days later, aged 62.  Each daughter now has a third of Mike’s pension fund monies available to them.

Additional guidance from the FCA

In its Consultation Paper 17/16, the FCA proposes additional guidance to help advisers to assess suitability, and, importantly, to clarify its expectations of the adviser community.

In assessing suitability and to provide a suitable personal recommendation, an adviser should consider the following elements:

  • The client’s income needs and expectations and how these can be achieved; the role which safeguarded benefits play in providing this income and the impact and risk if a conversion or transfer is made;
  • The specific receiving scheme being recommended following the transfer and the investments being recommended within that scheme to ensure that it is appropriate for the risk profile of the client;
  • The way in which the funds will be accessed, either immediately or in the future, including follow-on arrangements;
  • Alternative ways of achieving the client’s needs. For example, there may be ways for a client to provide death benefits which can be funded from income rather than by a lump sum funded by a pension transfer, and which does not carry so much risk;
  • The relevant wider circumstances of the client. These might include tax issues, death benefits, interaction with means tested benefits, state of health, family situation and other sources of retirement income.

We all know that the world of pensions and retirement planning has changed significantly in recent years. No doubt this will continue at the same rate of change for the next few years.

It is important for us to adapt. The introduction of pension freedoms and the more recent FCA consultation have altered the options available and how these might be assessed.

For some clients, a transfer may now be suitable when it wasn’t before.

So, for some, perhaps previously a “Should I Stay?” is now a “Should I Go?”

About Lee Pringle

Lee is a Wealth Planner with Succession Group, based in Harrogate, North Yorkshire.  He has worked in financial services since 1992, in a variety of financial planning and managerial roles.  Lee is a Chartered Financial Planner and Fellow of The Personal Finance Society.


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All figures correct as at 01.02.2018.