The view that its safer to advise clients to remain in a DB scheme may no longer hold true
I have been talking at seminars recently about the benefits and pitfalls of a defined benefit transfer: things to watch out for and what needs to be included in the report. The common stance is still that DB transfers are a dangerous thing to recommend.
Many advisers start with the premise that it is a bad thing to do and then have to convince themselves it could be in the client’s best interest. But there is also a concern that stopping a client from transferring could result in a complaint from the member or their family further down the line. After all, pension benefits do not just impact the scheme member these days; it could also affect generations to come.
The biggest issue surrounds the death benefits available in a defined contribution scheme versus those in a DB scheme. This used to only really be an issue where the member was single and nothing would be payable on their death. But it was quite simple to deal with, as it was an all or nothing option and the client could easily understand the implications of not doing the transfer.
Things became a little more complicated when pension freedoms were introduced.
Take the example of if the beneficiary did not need a regular income or would prefer a lump sum. This may still be a reason to transfer because, although a pension would be payable on the death of the member, more flexible benefits might be available. In addition, the benefits in the DC scheme may not be taxable on death if the death occurs before age 75.
Involving all those that may be impacted might not be feasible but it is wise to ensure those closest to the member are made aware of any decision made so that everyone is on the same page.
This would be particularly relevant if the member has any health issues where inheritance tax might be a consideration. Care also needs to be taken when dealing with vulnerable clients or clients at times of stress.
Meanwhile, many DB schemes are underfunded with payment plans in place. This sort of information is relatively easy to come by but knowing if the employer is likely to be able to make these payments in the long term is more difficult.
Should the scheme end up in the Pension Protection Fund the comparison of benefits will not have been accurate. There is little that can be done about this with the exception of making the client aware of a worst case scenario. If this issue is ignored or the client does not understand then there is another case for complaint in the long run.
Execution only and insistent clients
Before pension freedoms came along, a member could opt to transfer without advice should they want to and many pension providers would accept the transfer. Now, though, advice is required in most cases and making a recommendation to remain in the DB scheme will really limit the member’s options should they want to proceed anyway.
This could easily be a contentious issue with the client: the ceding scheme that requires advice to be taken is not concerned what that advice is but a receiving scheme will want to protect itself and will often insist the advice to transfer is positive. This could put pressure on the adviser to change their advice, even though it is felt it is not in the client’s best interests.
There is no right or wrong answer to the transfer question in all cases. For some, there will be a fine line between a positive recommendation to transfer and a recommendation to stay in the DB scheme. Understanding and documentation are key to ensure that all parties are aware of the implications and protected in the long run.
The varied retirement and death benefit options available make decisions even more complex on a purely factual basis, without even dealing with the soft facts that are just as important. The view that advising someone to remain in a DB scheme is safer than advising a transfer may not hold true in this day and age.
Claire Trott is head of pensions strategy at Technical Connection
She will be joining us at Money Marketing Interactive as a speaker on May 18th.