The dramatic rise in final salary transfers is the most significant trend the world of pensions has seen over the last year. Many people are attracted by the high transfer values currently on offer, as well as the flexibility, control and superior death benefits available.
However, some may overlook or not fully understand the longevity and investment risks they will inevitably take on.
The FCA has already shown interest in this market, so expect a full regulatory review emerging at some point in the near future.
Despite that being on the horizon, the need for advice in this area is clear. People are looking for help and there is a danger that demand is greater than the supply of advisers able and willing to get involved.
Many people are likely to be better off staying where they are but there are situations where a transfer will be appropriate advice. In those situations, it is key the documentation is as robust as possible. The current transfer value analysis requirements are – to be blunt – not fit for purpose in the new world of pension freedom.
A critical yield is of little or no use in some circumstances, especially in the many cases where benefits are being taken immediately after transfer. Other people have no intention of ever buying an annuity, meaning a system based on that concept is flawed.
The current transfer value analysis requirements are – to be blunt – not fit for purpose in the new world of pension freedom.
So while TVAS remains a regulatory requirement in most cases, other analysis and justification will be needed. For example, greater death benefits and more flexibility may be key customer desires. Documenting alternatives – such as separate protection policies, or using other pensions or assets to provide flexibility – will demonstrate consideration of other options.
The role of the cash flow
Cash flow modelling, including stress testing that model, is likely to play an important part in helping customers understand what the future may hold if they transfer. And considering alternatives that help customers mitigate risks after transfer can show they were aware of the risks they are taking on.
In its “Advising on pension transfers – our expectations” alert published in January, the FCA made clear it wants advisers to take into account the precise investment strategy of the new contract, the likely returns on those investments and the costs associated.
Any documentation clearly needs to include these details and bear in mind that may be more challenging in cases where the transfer advice is provided by one adviser, while the selection and management of the new contract is done by another firm.
Final salary transfers are a complex and emotive topic, which is precisely why people need the expert help advisers can bring. Despite the challenging regulatory environment in which we all have to operate, I firmly believe the advice community will step up.
Andrew Tully is pensions technical director at Retirement Advantage