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Considering giving advice on DB transfers?

by Louise Spence on 24·10·2017

With the FCA recently determining that just 47% of the DB transfer cases they analysed were 'suitable'1, they have advised that firms must take steps to ensure and demonstrate suitability.

At The Timebank we work with a vast range of financial planners and their compliance regimes and it has become clear there is no uniform, step-by-step process for DB transfers detailing what you need to do and when.

We are often approached by planners who, while G60/AF3 qualified, have in the past historically avoided DB transfers due to the high risk nature of this business. What has become apparent, is that more and more of your clients are aware of 'pension freedoms' and are seeking advice on the possibility of accessing these funds.

What are the initial considerations for the financial planner?

The default position (COBS 19.1.7G08/06/2015) is that the planner starts by assuming a transfer will not be suitable and evidence is required to demonstrate a transfer in the client's best interests.

This is NOT a definite guide in how to correctly advise on a DB transfer from start to finish (that would be a long article!) but highlights some important factors for discussion with your client.

  • Client objectives
    This one is a given for all advice cases. For DB transfers, there is an inherent attraction for a client to want to access a large sum of money that would otherwise not be available. It is easy to tick boxes on a standard pension transfer questionnaire stating objectives such as 'wishes to pass funds to future generations on death' or 'would like to access benefits flexibly'. This exercise doesn't ultimately mean a transfer is suitable and it is important to document full and frank discussions around the client's need to transfer and what other options have been considered as an alternative.
  • Client's attitude to risk
    A further discussion topic in itself - but an important consideration in terms of giving up a guaranteed income alongside the client's willingness and need to take the risk required to match investment returns as well as their capacity for loss.
  • Cashflow planning
    A very useful tool for placing the DB funds in context of meeting income needs and importantly, the sustainability of this income in retirement. This will also consider details of other income sources and assets which may provide retirement income, to help determine the client's capacity to take the risk of giving up a guaranteed income. The FCA's consultation paper CP17/16 published in June 2017 suggested a replacement for the TVAS system with one which would include 'obtaining an understanding of the client's potential cashflows'.
  • TVAS Report and Critical Yield
    COBS 19.1.2R(1) requires a comparison between the likely benefits to be paid under a DB scheme and the benefits offered by a personal pension scheme. This involves obtaining all relevant information from the scheme and considering the critical yield. While the critical yield can be useful, it can't be considered in isolation, particularly in light of pension freedom meaning that many clients will be flexibly accessing benefits in future.
  • Death Benefits
    Commonly being cited as a driver for a transfer, making it important to consider life assurance as an alternative to meet this need. It may often be the case that a client doesn't want to pay a high premium for life cover, however it may be an option to fund this from the guaranteed DB scheme income.
  • Tax Issues
    With high CETVs on offer, the lifetime allowance will potentially be higher on transferring to a DC scheme than by remaining in a DB scheme. In addition to this, the proceeds may potentially become liable to IHT if the client dies within two years of the transfer, another reason why it is important to have an understanding of the member's health position.
  • The Existing DB Scheme
    A full understanding of the scheme itself is required, taking into account everything from the CETV to revaluation/escalation rates, GMP, spouse's pension, and death benefits. It is important to consider factors for early retirement and commutation factors for taking a pension commencement lump sum, which will reduce the ultimate retirement income. In addition, the funding position of the scheme and how likely it is to be able to meet liabilities without going into the Pension Protection Fund - how does the annual pension income compare with PPF limits?

How can Timebank help with the process?

Obviously we don't know your client as well as you and we cannot ultimately determine suitability for them, but we can be on hand for a variety of functions throughout the process:

  1. Initial Sense Check
    A sense check at the beginning - we are available to clients by phone or email to chat through a potential transfer. The outcome of this call may reinforce the planner's initial thoughts or it may provide further options for discussion that hadn't been considered.
  2. Data Harvest
    Liaising with scheme administrators - one of the most difficult and time consuming parts of this process can be extracting timely information from the scheme administrators. There is nothing more frustrating than receiving a CETV only to be informed it will take a further 4 weeks to provide commutation or early retirement factors.  We can manage this process from the start - from submitting letters of authority, requesting all the information needed at the outset and inevitably, chasing the administrators for gaps in the information or clarifying anything unusual that may crop up.
  3. TVAS
    It may be your only requirement is for The Timebank to complete a TVAS report. This will provide the basis for further discussion with your client, which may or may not lead to a transfer recommendation taking all factors into account. With our paraplanning club service, you can pay for whichever parts of the process are required.
  4. Suitability report
    We can draft a client-friendly suitability recommendation, whether this is to transfer or also importantly, not to transfer. The Timebank's suitability report has received a Crystal Mark from Plain English Campaign, meaning it provides clear and concise information and avoids unnecessary jargon. It has been designed in line with the FCA guidelines for suitability reports as set out on COBS 9.4. Along with the report we'll provide you with a checklist to make sure all the salient points are covered and if necessary, we can even complete your own compliance regime's forms or new plan illustrations as required.


1 FCA - 'Our work on Defined Benefit Pension Transfers' published 03/10/2017

This study of 88 DB transfers since October 2015 determined:
47% were suitable
17% were unsuitable
36% where it was unclear if the recommendation was suitable